We as property investors love to indulge ourselves for owning properties which perform well in both capital growth and rental yield. The burning question is whether it is possible to achieve such outcome in an ideal world. The short and simple answer is close to ZERO.
For the time being, let us explore the five phases of real estate market cycle to understand the reasoning behind most property buyers decision to chase either capital growth or rental yield in their investments while not both.
1. Recovery Phase
Every property market cycle starts with a recovery phase in which various economic and non-economic factors catch up with each other. There will be minor adjustment or correction to the property values from the previous boom cycle.
2. Neutral Phase
A short period of stability usually occurs in the market prior to the next upturn. Property prices become stagnant as it reaches the bottom of market where supply and demand is in equilibrium state.
3. Upturn Phase
Property values will slowly increase in the rising market and creating attractive investment opportunities for both home buyers and investors in the process. As a result of the continuing strong interest from property buyers, the demand for properties outweighs the supply, and pushes the market towards the boom phase.
The upturn phase is also referred as the seller's market as property owners tend to hold on to their properties for better sale results due to the strong market activity.
4. Boom Phase
Property prices continue to surge at a rapid rate until it reaches the peak of market. The boom phase is generally the shortest in the cycle. As the boom continues, the market is flooded with more properties. The supply of properties will gradually exceed its demand when the market begins to be deprived of its absorption power and this leads to the end of the boom phase.
5. Stressed Phase
As the boom phase ends and with more properties entering the market, this oversupply of property causes the market to weaken and property values begin to drop as a result of less competition in those properties that are available for sale. Many buyers who have over committed themselves financially in their property purchase in the previous phase may be forced to sell as they struggle with their mortgage repayments.
The stressed phase is also referred as the buyer's market as property buyers take advantage of the depressed market conditions to snap up property at a bargain price.
We will resume our discussion on this subject in the next article.
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