REAL ESTATE CYCLES : NATURE, CAUSES, EFFECTS AND INVESTMENT STRATEGIES

Abstract

Players in the local property market acknowledge the existence of cyclical swings in property values and activities over the last eighteen years, but few have formulated strategies to cope with this phenomenon. This study attempts to look into the nature, causes, effects and investment strategies for the residential cycles. The phenomenon of real estate cycles is a manifestation of the imperfect operations of the property market. Due to incomplete information and long response lag which characterise the property development industry, supply tends to overshoot demand; the durable nature of real estate and its wide demand fluctuations also contribute to the wide swings in prices. The Republic's residential cycle can be expressed through the relationship between vacancy rates and inertia in expectations. Significant decline in vacancy rates would overcome inertia in expectations. Once this has been achieved, minor increase in occupancy rates would boost property prices further, which in turn induces new constructions. This would set the upswing phase of the residential cycle underway. The causes of property cycles could be classified under Economic, Social and Political or Governmental factors. Economic forces are significant as a booming real estate cycle was "demand led" and frequently the result of favourable business conditions and expectations. More importantly, the property market followed the fluctuations in the performance of Singapore's economy very closely. On the other hand, social forces were secondary in influencing cyclical activity as they were limited by the economic principle of "ability to pay". Lastly, governmental forces through their public finance policies and various regulations were important factors shaping the residential cycle . The effects of cyclical movements were examined in relation to condominiums. The analysis revealed that condominiums with disparate features and location responded differently to each phase of the real estate cycle. Successful strategies in dealing with the residential real estate cycles could be formulated. Through a careful evaluation and selection of investment opportunities in the correct framework, coupled with skillful management of the risks involved, appropriate strategies can be prescribed to cope with each phase of the residential real property cycle.