Understanding the “Real Estate Bubble” as part of the “Real Estate Cycle”
February 11, 2007 by Maricel Ferrer-Custodio
Filed under Finance
So much had been said about the real estate bubble, that for some it sounds like the end of an era. Gone were the days when real estate used to be the most popular investment choice.
However, the real estate bubble is just part of the real estate cycle. It has been going on for years. Its not something new to our times right now.
Wikipedia defined the real estate bubble as:
"… a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid speculative increases in the valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements, followed by decreases (also known as a house price crash or a market correction) that can result in many owners holding negative equity (a mortgage debt higher than the value of the property)."
It is important to take note of the word "periodically" which means it occurs from time to time as in a cycle. A real estate depression has always been preceded by a previous boom. To understand it better, here is a table by Fred Foldvary; an Economist from Santa Clara University, summarizing the real estate cycle in the US since the 1800’s to Present. To have a more detailed overview of the real estate cycle, you can read his article which cites the other factors involved.
After a depression, there is no other way for real estate to go but to recover. The decrease in value of real estate such as in housing is a market correction. This leads to a decline in investors buying properties. This decrease in demand will eventually lead to a decrease in supply of investor driven properties. As the population grows (life must go on!), this decrease in supply will eventually catch up with the increase in demand…pushing rents to go up. It provides a good atmosphere for the speculators and investors to come back to the market. This creates an increase in demand causing the prices of real estate to go up again.
For every "bust period", there is always a lesson to be learned. It makes you more resilient to the next bubble.
I have personally experienced this so called "real estate bubble" thrice already. My family has been in the real estate industry since the mid-80’s, and even earlier for my father. We have encountered several "booms" and "busts", but as the saying goes, it is still "business as usual".
In fact, the depression in real estate that I experienced was much worse than the ones that occurred in the first world countries. Coming from a third world country, aside from a bad economy; political instability, coup d’etat, sudden devaluation of our currency (happening almost overnight) and horrendous interest rates climbing up to over 20% triggered several recessions. However, real estate continued to be a profitable investment in the long run. The seasoned investors I’ve met remained profitable throughout those boom and bust periods. They continued to grab opportunities as they become available.
Real estate is like a strategy game, you need to be knowledgeable in order to reap the rewards. For some, real estate is their lifetime investment, for others it is their life and for many, it is a commitment that they need to pay for the rest of their lives. For something that big…I think you owe it to yourself to be more educated and come up with smart decisions to make yourself more resilient to the real estate bubble.
To start with, you can read this article I wrote "Securing a Good Deal during a Real Estate Bubble". For those who are serious in entering the business, you can enroll yourself in real estate courses such as those offered in the Trump University. Even Donald Trump, was not immune to the effects of recession. But as I’ve said, there are lessons to be learned in every pitfall. At present, he is still one of the most notable real estate businessman. He is more bouyant now to any recessions, as you can witness in the expansion of his real estate business at the current real estate bubble.
You can read more about his real estate achievements on my previous article "The Triumph in Real Estate of Donald Trump."
Interesting read this… It’s exactly what we’re experiencing in South Africa at the moment…
Over the last year, interest rates dropped to a nice 10.5%. Everyone started buying but the prices became astronomical. To get into real estate now is almost impossible for first time buyers because of the price increases but funny enough, the rental prices are now at an all time low.
It’s a pity though because now all we’re seeing is big developments and estates and people are just buyuing without even thinking.
Not a problem for my family as we run a bond origination franchise but a pity for those trying to buy!
Nice article
The real estate cycle has been going on for ages. For those who are serious to enter the business, it is best to understand how the cycle behaves, the factors affecting it and what were the historical datas of previous boom and bust periods. The ones who usually get burnt…as you’ve said “are the people who are just buying without even thinking. Real estate is like the stock market…whether the share price goes up or down you can earn…thus whether its a boom or bust period..there are still opportunities to be made. Your business has a good team up with real estate. Once your finances are in place, it is easy for you to grab an opportunity when it becomes available. The people in South Africa must be doing very well…our interest rate in Australia hovers around the 7% mark and people are complaining already.