One of the most valuable pieces of information when it comes to selling, buying, or even just looking into the property market is actually understanding how its rises and falls function. While no one’s omnipresent enough to tell how a price will drop before it does, understanding why it dropped can help you make a better financial call out on the market, and could lead you to your next home or investment.
Like any market, supply and demand seems to be the basis for the property market. And like with any market, supply and demand is a much too simplistic model to explain how it really works. So to start, let’s try and tackle the most influential aspect for buyers and sellers – the cycle that lets you ride the market’s downs and lows so reliably.
Defining a Market Cycle
Simply put, a market cycle is a reoccurring pattern of a market environment that causes one asset to outperform others – in this case, in the property market, a market cycle consists of rising and falling house prices. More specifically, you need a total uptrend and a subsequent downtrend to complete a cycle, which is then measured from its highest point in pricing to its lowest point in pricing, and considered complete when the market price begins to “normalize”, that is, return to what it was before the up or downtrend.
The reason why market cycles are such a huge part of market research is because pinpointing a cycle can help you and other buyers and sellers make the absolute most out of your sales – however, just like any market occurrence, such exact pinpointing is also practically impossible, and theoretically an open question in mathematics. However, cycles have been studied for a long time – and according to Harvard, they have a specific anatomy first discovered by Henry George.
If the economy is a number of recessions and recovery periods in constant ebb and flow, then the market cycle or property cycle is a symptom of these conditions. Phase one of the uptrend in a cycle is the financial recovery of the market from a previous cycle – with a recession causing governments to turn to lower interest rates to drive up business, more and more companies slowly begin to fill the void of business at the end of a recession by taking advantage of these rates and expanding. As this happens, vacancy in the housing market decreases – the demand increases and begins to meet the supply – but no new construction begins.
Until the next phase: expansion. Herein, the natural next step for businesses and individuals looking to expand their own businesses while most of the market is being occupied, is new construction. When existing owners raise their prices to the point of unaffordability, or all supply in property is exhausted, construction on new property begins in order to accommodate the growth in the economy and the blooming of businesses and families alike.
However, unlike in the production of a mass-manufactured good, building houses and buildings takes its sweet, sweet time. So, what happens then? What happens as more and more people are looking for places to move their lives and livelihood into as supply decreases and new supply is being met by the requirements of permits, zoning restrictions, resource acquisition, building plans and the actual construction itself?
The market’s existing inventory on houses and buildings increases in cost, both for sale and rent. And as the rent increases, investors begin to anticipate and forecast how much the rates increase in the future, affecting the prices of newly-built properties not by adapting them to the market’s true conditions, but by pricing them based on a speculative forecast. And as it so happens, most investors consider the price hike justified by the promise of more and more growth in the market.
That’s where things get tricky. As occupancy rates reach a maximum and begins to drop, it still outdoes the market’s average occupancy rates – and as long as it does that, rent continues to rise. As long as rent rises, investors are in the clear for more new construction. However, that’s what creates a “hyper supply”. If the rise in rents was caused by a hypo supply – that is, not enough property to meet demand – the exact opposite happens when there’s too much on the market for people to use.
As occupancy falls below the long-term average rate of occupancy, you’re entering a recession. By this point at the latest, new construction halts – and more and more properties are left vacant and empty. To stop development and inflation, the central bank hikes up interest rates once more, curbing investment. And now, the cycle is nearing its completion as economic difficulties render less people capable of owning, much less building a home or office.
Getting Your Daily Dose of Property News
So the question now is – how can you use this knowledge to actually determine when the best time is to make a buying or construction decision on the property market? The best answer is the simplest one – watch the news, and read the papers.
If you want to get started on informing yourself on the current state of the market in Thailand, it’s best to go for a variety of different online sources when disseminating information. No other medium of information is as powerful as the internet, but like any source, you want to approach the news with a little dose of skepticism. An independent online news provider, and secondary sources for property news like DDProperty that have no special interest in any specific trend in the market can give you the best information.
Investigating multiple sources also lets you get a broader idea of what the general trend in the market is like, especially if your news sources are attempting to forecast the market. While you won’t be able to pinpoint when a cycle’s main points occur, keeping an eye out for government actions, central bank moves, and the general house price index can help you make the right call financially. As an example, Trading Economics points out that the house price index is dropping once more, after gaining since early June last year.