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On Real Estate Cycle
On Real Estate Cycle
• The real estate cycle, sometimes called the housing market cycle, is a model that represents economic
changes within commercial and residential real estate industries. The cycle is made up of four parts:
• Recovery
• Expansion
• Hyper supply
• Recession
• The real estate cycle refers to the fluctuations in economic activity, defined by periods of expansion
and contraction.
• Expansions are phases when the economy is growing. Typically, during an expansion period business
grows, unemployment is low and consumers are spending money. The period leading up to the 2008
recession is an example of an expansion. From 2001 to 2007 the American economy experienced
steady growth in business and low unemployment, resulting in the economy expanding.
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WHAT IS THE REAL ESTATE CYCLE?
• When economic growth begins to stall, economists refer to this as the peak of a
real estate cycle. This is when the economy has reached its highest growth
potential. The peak of an economy occurs after a time of expansion and before it
begins to contract.
• An economic contraction is when the economy begins to shrink. During
economic contraction, many businesses reduce their production because
consumers are spending less money. The reduction in production can lead to
layoffs and contribute to increased unemployment.
• Depending on the severity of the contraction, economists will refer to this phase
as a recession or depression. The trough is the lowest point of contraction and
occurs before the economy begins to grow into a new phase.
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REAL ESTATE CYCLES AND THE ECONOMY
• The Federal Reserve oversees and sets interest rates based on the performance
of the economy. When the economy is running well, interest rates tend to be
higher. There are more people buying and investing and most consumers don’t
need an incentive to continue spending.
• When the economy is performing poorly, interest rates are lowered to encourage
spending. When experiencing economic contraction, consumers are more
conservative with their spending. By lowering interest rates, consumers have an
incentive to purchase more, even if unemployment is up and the productions of
goods is down. The lower interest rates give home buyers an incentive to
purchase and homeowners an incentive to refinance.
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HOW LONG IS THE REAL ESTATE CYCLE?
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THE REAL ESTATE MARKET CYCLE, PHASE BY PHASE
• There are four phases of the real estate cycle. Each phase
provides insight into the best times to buy, sell, or hold real
estate. Read on to learn what you can expect from each
phase of the real estate cycle.
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IMPORTANCE OF THE REAL ESTATE CYCLE
• The real estate cycle can provide reliable information about the
possible returns of an investment property. As an investor, you
should determine if your property is in the recovery, expansion,
hyper-supply, or recession phase of the real estate cycle. Doing so
will allow you to make a more accurate assumption for the length of
time the property must be held and the proper exit strategy to take.
• Additionally, the real estate cycle can predict the income and
appreciation performance of an investment property. This will allow
you to better decide when to make capital improvements.
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During the recovery phase, the
economy has characteristics of a
recession, and is considered the
bottom of the trough.
PHASE 1: Unemployment rates are typically
high and consumption of goods low,
and houses become more affordable
RECOVERY for those looking to purchase a home
during an economic recovery.
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When the economy reaches the
point of expansion, the market is
on the upswing and job growth is
strong. When available property
PHASE 2: becomes scarce, the basic law of
supply and demand kicks in. As
occupancy rates improve, property
EXPANSION values and rental rates increase.
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The economy is considered in a
recession or depression when
vacancy levels begin to rise due
PHASE 4: to too much available inventory
and economic growth slows
RECESSION down. Rent growth during a
recession is either negative or at
levels below the rate of inflation.
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FACTORS AFFECTING THE REAL
ESTATE MARKET CYCLES
The makeup of the population, and major
shifts in this population makeup, can drive a
market significantly.
1.
DEMOGRAPHIC For example, the baby boomer generation’s
S : retirement is expected to cause major shifts
in the housing market, as many choose to
downsize or move to vacation areas.
Interest rates greatly influence potential
homebuyers’ buying power. When interest
2.INTEREST rates are high, it could serve as a deterrent for
many would-be buyers from buying.
RATES: Conversely, when interest rates are low, it
could encourage a spurt in home buying
activity, as the long-term cost of financing a
home is cheaper.
The overall health of the economy is also a
heavy-hitter when it comes to predicting the
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housing market cycle. Generally, when the
economy is doing well or is in an upward trend,
consumers feel more encouraged to buy
3. GENERAL residential real estate. They feel that their
ECONOMY: personal wealth will improve while placing a
bet that their property’s value would continue to
increase. Generally, if the general economy is
doing well, the real estate market is also doing
well. If the economy is sluggish, the real estate
market also tends to follow suit.
Insert Image The government will occasionally intervene
with policies to help boost a market that is
particularly sluggish or in a prolonged
4. recession. Policymakers have the ability to
implement tax deductions, subsidies, tax
GOVERNMEN credits, and different homebuyer programs to
T POLICIES: incentivize consumers to purchase real estate.
These types of governance mechanisms can
greatly influence the US housing market cycle
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5. CONSUMER Consumer confidence is simply the outlook
consumers have of the economy, both in real-
CONFIDENCE: time and for the future. Investment deals and
spending will be higher when consumer
confidence is high, and it will be lower when
consumer confidence is low
WHERE IS THE
PHILIPPINES
IN THE
REAL ESTATE CYCLE?
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The Philippines has emerged as one of the
fastest-growing economies in the region in
recent years.
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Due to scarcity of land, property values in
different submarket in Metro Manila posted
a big an increase sans land development in
the area. Based on the data published by
Leechiu Property Consultants, land values
in major Central Business districts in Metro
Manila increases from: 13%-40%
in 2016 to 2017,
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while the increase in
Land Values in CBDs (In Philippine Peso/sq.m.)
Source: LPC
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In Metro Manila, the overall vacancy rate in
office market stood at :
4% in Q3 2018
slightly down from the previous quarter of 4.5%
according to Knight Frank. Meanwhile, in the
residential condominium vacancy is down to :
10.6% from 10.8% in Q3 2018.
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Overseas Filipino Workers (OFW) remain as
an economic growth driver as remittances for
the first eleven months of 2018 remitted a total
of:
$29.1 billion, 2.9% higher than
These figures were augmented by the Businessthe
same period.
Process Outsourcing or BPO, as of June
2016 the number of establishment involved in
BPO is 851 with an employee of 575,600
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(Businessworld, 8/7/2018).
Also, one of the major
driver of the demand for
real estate is:
TOURISM
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Data from Department of Tourism posted an
increase of 7.7% in tourist arrival in 2018
compared to its level last year.
Growth in tourism significantly benefited real
estate. The hospitality industry continues to
grow and attracted foreign brands to setup their
presence in the country or partner with the
local businessman in building one.
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The prices in real estate, vacancy rate and land
values mirrors the present situation and the
position of the country in the real estate cycle. It
is now at the peak of expansion stage of the real
estate cycle. How will it last, it will surely be
based on the ability of the different stakeholders
to control and prolong the period. We may have
the OFWs which makes us resilient to crisis,
however it is a cycle. There is boom and also
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ON THE CONCLUSION:
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Real estate in the country will continue to
grow and help the nation in spurring
economic development, not only in the cities
but also in the countryside.
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References:
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END….
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