Understanding the market cycles
“Real estate moves through a cycle of recovery, expansion, hypersupply and recession. How can you use this to your advantage?”
South Africa has two main types of property purchasers: the end user buying a home and the investor who buys to let. Both seek to maximise their return on investment. The only difference is their approach. Homeowners are typically emotional, buying a property they love based on affordability and proximity to schools. Investors pragmatically follow their own investment model. The question in both cases is when is the best time to buy or sell.
Someone once told me that you do not make money when you sell but when you buy. The implication is regarding the cyclical nature of real estate and that accurately choosing the right time to buy maximises or minimises the profits.
The property cycle has four stages: recovery, expansion, hypersupply and recession. Both sellers and purchasers can use this to their advantage if they understand which cycle the market is currently in and anticipate where the market is going. Maximising a return demands an understanding of those cycles and their affect on values, and the realisation that property is a long-term investment.
To elaborate, prized suburbs such as Umhlanga, Durban North, Sandton or Camps Bay may have a surplus of buyers and low stock, triggering overinflated prices and a seller’s market, while neighbouring suburbs may experience the opposite.
For example, property in affluent areas of Durban could expect growth of 6% to 10% in the next year compared to affluent areas of Cape Town such as the V&A Waterfront and Camps Bay, which could expect price increases from 10% to 15%. Camps Bay breaks records for the highest value of property sold in South Africa.
A market in recovery would have an oversupply of buyers looking to purchase property, signalling high demand (a seller’s market). When more sellers realise that prices have increased, there is a further influx of properties, triggering the expansion phase. Typically there are the same amount of buyers as sellers. Once the market is flooded with properties, the market goes into hypersupply phase. Overinflated prices force buyers to sit back. In the final cycle – recession – prices begin to drop.
To maximise profits, the ideal phase to purchase property would be at the end of the recession cycle, maximising lower market values. The ideal phase to sell would be the end of the expansion phase.
Investors also should not buy and sell in the same cycle as there normally wouldn’t be sufficient capital growth to cover expenses.
Homeowners in Gauteng, where the trend in residential property prices is flatlining, should focus instead on growing capital. That said, there are great property deals throughout the cycle.
• Recognise that greater research yields better informed decisions
• Have an appropriate investment model based on affordability, interest and growth expectations
• Understand suitable property investments
• Be financially prepared for opportunities
• Have a committed investor mindset
• Use reputable companies
• Compare their property to prices achieved by comparable neighbourhood homes
• Know the first offer is normally the best one
• Decline early occupation as it often ends badly
• Know that overpricing is why 90% of homes don’t sell within the prescribed period
• Provide the correct house plans upfront
• Recognise the value of building inspectors to identify problems before putting a house on the market
Words: Jonathan Acutt, Acutts Group MD