Housing Market Cycle
As an investor in the housing market or a dealer, you need to keep track of the changing market both on the scales of macro and microeconomics. The real estate market is the most stagnant market where certain situations can exist for a more extended period and is also the highest investment market.
The housing market cycle affects the real estate market in the most ways possible. The real estate cycle is directly related to the country’s changing economy. However, you cannot assume a single factor is responsible for real estate growth.
What is a Real Estate Cycle?
It refers to the four phases of real estate that mark the beginning of a specific phase in the market till the stage ends. These four phases are:
- Phase 1: Recovery
- Phase 2: Expansion
- Phase 3: Hyper Supply
- Phase 4: Recession
Reasons for a Real Estate Cycle
Like any other economic activity, various reasons affect the housing market, resulting in the cycle. However, there are few valid causes responsible for the cycle.
- Changes in the Economy: Various factors in the global economy reflect on a country’s industries, including the real estate market. When the market is doing good, people earn more and invest in real estate as it generates maximum returns on investment. Each year the demand for housing is increasing, and it reflects the overall economy of a country, thus a change in the cycle.
- Interest Rates: Interest rates largely affect an economy’s investing and buying patterns. In real estate, the mortgage rate, payment rates, taxes, and all housing expenses are determined by the interest rates fixed by the government. Higher interest rates reduce the possibility of people investing in housing. However, lower interest rates will affect housing prices, and there will be a price hike.
- Income Distribution and Demographics: According to a report, a population shift and irregular income distribution also affect the housing market cycle. Due to the rise in the income group of the population and growth in the per capita income, there will be more investment and an increase in homeownership. According to a report, during the ’90s, homeownership in the US grew by over 18%. There has been a trend of single-family rental homes in the US and the world.
- Government Policies: Taxes, policies, interest rates, and many other factors introduced by the government primarily affect the housing market of a country. The quick increase in property prices and the following market for single-family rental properties are caused by the low borrowing rates intended to encourage spending. These include a deduction of running costs, including property taxes and capital gains tax; transportation and work-related expenditures for the business are tax deductible, and depreciation on assets is an expenditure employed to lower income tax.
By looking at the current scenario, today’s housing market is in the expansion phase. And with the continued expansion of real estate, rising skylines, and increasing supply for demand, it has already entered the hyper-supply phase. Thus, investments must be made keeping the value, returns, and housing needs in mind.