How to identify an upturn in the housing market

Throughout history there have been several periods of economic growth and decline, known as the economic cycle, affecting all markets and industries including property. Successful property investors buy at the bottom of the cycle to maximise their returns, but how can we recognise an upswing in the market and consequently identify the best time to buy and where?

The five main stages of the economic cycle

The economic cycle can be defined in five main stages, with each one flowing into the next:

1. Peak

At the peak of an economic boom, stocks and property are overvalued and credit providers are burdened with debt.

2. Contraction

As the contraction hits, credit freezes, housing sales slow to a halt and the stock market begins to move downwards until the economy is in recession.

3. Recession

Property prices and stocks are at a low and credit is essentially frozen.

4. Recovery

The recovery begins once credit becomes available again for the purchase of undervalued property and shares. It is at this point when institutional investors move in.

5. Prosperity

Prosperity follows as prices rise again, salaries increase and credit providers become more open to risk.

When have we seen this economic cycle before?

The last major correction in the housing market for the UK was in 1991. Financial institutions were offering 100% mortgages to feed the strong desire to own property leading to the peak of the housing bubble.

As the economy slowed down, 75,540 repossessions followed (the highest recorded in any one year) due to the burden of subprime debt. It was not until 1994 that sustained house price growth was seen and the recovery began.

The UK economy then registered 4.2% GDP growth - the highest level in six years. This economic growth and rising incomes meant people could afford bigger mortgages and so demand for housing increased once more.

Property - a tangible asset

Property is often seen as the most stable of assets despite the property value peaks and troughs throughout the economic cycle. Unlike stock investments in companies, the owner of a property has a tangible asset of bricks and mortar, which can be held when the economy is bad and store value for when it returns. As well as this, a growing population will always need somewhere to live; therefore there will always be demand.

Predicting an upswing

By applying what we know about economic cycles and the housing market we can begin to forecast the upswing in a market which will help property investors today.

Our current financial crisis has followed a very similar pattern to that of the 1991 crash, beginning in early 2007 when the value of subprime mortgages was estimated at USD $1.3 trillion, the rising house values had prompted lenders to take more risks.

As a number of these providers began to collapse under the weight of defaulted loans, including the highly documented fall of Merril Lynch, the scale of the problem became clear.

As the flow of credit seized between banks, the knock-on effect included reduced lending to consumers and a slowdown in the housing market.

Once interest rates are low enough, credit flow has become liquid once more and institutional investors are seen to enter the market, confidence will return and the upswing will begin.

Starting at the beginning...

Generally upswings start in the same place the downturn first took hold. In today's instance, we should be looking at the housing market in the United States, as soon as it begins to pick up, then it can be seen as a sign for the rest of the world.

Standard & Poor, the ratings and analytical company who produce the US Case-Schiller housing index, believes that by October 2009, the market will reach the very bottom. It also states that investors should begin to consider buying property as credit becomes more available.

vWe are starting to see this happening in the US with foreign investors taking a keen interest in the market. Huge property auctions are being held with some reportedly selling 80 properties on a daily basis.

Two major Chinese companies are organising buying tours to the US, travelling with up to 500 people with the purpose of purchasing undervalued property!

Looking towards other countries

However, as the majority of people watch and wait as the recovery takes a global hold, property investors can look at the countries and regions which haven't suffered dearly in the current economic downturn.

Central and Eastern Europe saw a slowdown in their economies and Bulgaria in particular has been unaffected by toxic debts and so GDP growth forecasts have been revised slightly downwards from 8% to around 5.5%, while the majority of developed countries face recession. There is therefore a much stronger base on which to build a recovery.

According to commented Mike Lenhoff, chief strategist and head of equity research at Brewin Dolphin investment management service providers: "The emerging markets could actually lead the way, as they do tend to sense the winds of change very quickly."

This is a sentiment which Joseph Upchurch, director of Aston Lloyd property developers, shares.

"Interest in Bulgarian property has remained strong, mainly as a result of confidence in the country's economy and a number of push factors from the UK," says Mr. Upchurch.

"Lending in the UK has all but ceased and consumer confidence in the stock markets is at an all time low and so people are looking for other markets in which to invest in the tangible asset of bricks and mortar.

"With the likes of IBM, Microsoft and GlaxoSmithKline leading the way in foreign direct investment, the capital Sofia remains a stable property investment option."

For more information and further research compiled by the Aston Lloyd Research department, visit www.astonlloyd.co.uk

Information courtesy of AB Property Marketing Ltd., and Aston Lloyd and Partners International

© PropertyIndex.com 2009 | Last Updated: 28th April 2009

View property news archive »