By Mr. Propwise
If you’ve been in the market long enough, you’d have noticed that property prices go up and down in stretches over varying periods of time. In markets as in real life, gravity rules – what goes up must come down.
Sometimes you hear people refer to periods when prices go up as a bull market, when everyone is obsessed with (and an expert on) property, you hear stories about people making lots of money trading properties, and property agents don’t bother returning your calls.
These are then followed by bear markets, when property prices are going down, overleveraged property owners stop talking about how many properties they own, and property agents that are still in the industry tell you how now is a good time to buy from the forced sellers.
We call these recurring patterns of gains and losses “cycles”, and while it is extremely difficult to predict them with any accuracy, the market often gives us clues as to what’s coming next.
Imagine if you could read these signals to get a fairly good sense of what’s coming next – whether the market is likely to fall or to go up. Wouldn’t that be extremely valuable to you if you were planning to buy and sell a property? Depending on the value of your property, we could probably even quantify that value in the hundreds of thousands of dollars over a cycle.
Introducing the Property Market Cycle ModelTM
It was for this purpose that we created the propietary Property Market Cycle ModelTM (PMCM) at PropertyMarketInsights.com. The PMCM basically splits the property market cycle into four phases: Early Bull, Late Bull, Early Bear and Late Bear.
Figure 1.1.1a is a summarized picture of the what the PMCM looks like. To create the model, various data sources such as property prices, transaction volume, the stock market index (usually a leading indicator for the property market) and a lot of experience and judgment were used. We use the Urban Redevelopment Authority’s (URA) Property Price Index (PPI) as a measure of property prices.
We will now look in-depth at each of the four phases of the PMCM.
Early Bear Market Phase
The Early Bear Market Phase starts when property prices start to turn negative after a bull market. During this Phase we typically see an acceleration of negative price growth and decreasing volumes – in other words, prices are falling quickly and few people are buying property.
Historically since 1996Q3, this Phase has lasted from 3 to 9 quarters with an average duration of 5.7 quarters, or just under one-and-a-half years. The average return during the Early Bear Market Phase is -25%, with a range from -12.7% to -39.6%. See Table 1 below for more details.
Late Bear Market Phase
The Late Bear Market Phase starts when property price decreases start to slow after a steep fall during the Early Bear Market Phase. During this Phase we typically see increasing volumes and conflicting signals from the stock market (i.e. the stock market is turning positive). We are nearing the trough of the cycle. The smart money is starting to pick up property bargains while desperate sellers who had been holding out start to capitulate.
Historically since 1996Q3, this Phase has lasted from 1 to 10 quarters with an average duration of 4 quarters, or one year. The average return during the Late Bear Market Phase is -10%, with a range from -4.7% to -17.7%. See Table 2 below for more details.
Early Bull Market Phase
The Early Bull Market Phase starts when property prices start to turn positive after a slump. During this Phase we typically see an acceleration of price momentum and increasing volumes – in other words, prices are rising quickly and lots of people are jumping into the market to buy property.
Historically since 1996Q3, this Phase has lasted from 4 to 14 quarters with an average duration of 8.7 quarters, or just over 2 years. The average return during the Early Bull Market Phase is 43%, with a range from 34.2% to 52.3%. See Table 3 below for more details.
Late Bull Market Phase
The Late Bull Market Phase starts when property price increases start to slow down after a steep runup during the Early Bull Market Phase. During this Phase we typically see decreasing volumes and conflicting signals from the stock market (i.e. the stock market is turning negative). We are nearing the peak of the cycle. Lots of people are still jumping on the property bandwagon and prices are still rising (albeit more slowly) but the smart money is selling or staying out of the market.
Historically since 1996Q3, this Phase has lasted from 2 to 4 quarters with an average duration of 2.5 quarters, or just over half a year. The average return during the Late Bull Market Phase is 6%, with a range from 1.5% to 10.9%. See Table 4 below for more details.
As of this writing, we are currently in the Late Bull Market Phase and likely transitioning into the Early Bear Market Phase, but are still not there yet – the 2012Q2 URA PPI flash estimate of a 0.4% quarter-on-quarter increase suggests there is still bullishness left in the market.
What Should Property Investors Do During Each Phase of the Cycle?
The PMCM is not meant to be an academic exercise but was created to help investors time their property purchases and sales.
DISCLAIMER: Before describing the best actions for investors to take at every Phase of the Cycle, please note that the following is not an investment recommendation and is not guaranteed to produce a positive result. Every investor’s personal situation is different and every market cycle is also different. Also, your exact investment return critically depends on the specific property that you buy.
The best actions offered below are based on the historical performance of the market over the past 3 cycles. Market cycles in the future will not mirror previous cycles but they will share similar characteristics as they are often driven by human behaviour, which does not fundamentally change. As Mark Twain is attributed to have said, “History doesn’t repeat itself, but it often rhymes.”
During the Early Bear Phase, historically the best action to take would be to sell your property. If you had not already sold your property by the time we enter the Late Bear Phase, then you should hold on to it. Investors who have a high risk tolerance can also enter the market to buy properties if they want to try and pick the bottom.
In the Early Bull Phase, the best action for investors to take would be to buy property. Entering the Late Bull Phase, shorter term investors would probably think about selling their property while long term investors can continue to hold on through the cycle. I’ve summarized the best actions for investors to take in the table below.
You should know that the PMCM looks at the overall market and the actions that investors should generally take, but every property purchase is a local one, and different locations and types of properties could perform in different ways.
By Mr. Propwise for PropertyMarketInsights.com, a Singapore property market research site that helps buyers and sellers make profitable investment decisions – subscribers get updates on where we are in the Property Market Cycle Model to help you time your investments.