During the last few years the real estate market was rising all over and we were experiencing a sellers market. The media went wild over the frenzy and everywhere you looked there was someone or something telling you that real estate was HOT HOT HOT! Prices were going through the roof and there was unprecedented growth and people were becoming rich by simply buying and selling houses.
Now the market going through a correction because there was too much growth too fast. In some areas prices and inventory levels are going to decrease. Is that a good thing? Yes, it is. It’s healthy for each market to go through it’s cycle. This ebb and flow is good and allows each market to grow and then collect itself and catch up, and then eventually grow again.
What has happened over the past few years is prices have increased and increased and just keep increasing. But this prolonged spur of growth can’t be sustained forever and there then there comes a point when people are no longer able to pay the prices of the homes. During the boom times people begin to notice how much the neighboring homes are being sold for and they want in on the action. When a market heats up and prices begin to rise quickly everybody starts throwing their homes on the market and the market becomes flooded with property.
Eventually when the demand slows, but people are still wanting to sell for more and more, those home-sellers (who are always the last to accept the end of a growth period) will need to adjust for this and the market can correct itself.
Here below is a wheel with what I call the 4 seasons of any market. I will explain them below.
This boom or growth time is called the expansion. Expansion brings job growth, population growth and a high demand on the infrastructure of an area. Roads need to be built, restaurants open, hospitals expand and prices rise. This in the Real Estate market brings new construction, new sub divisions and more money. Property prices increase and demand for the property on the market increased. This was felt here in New Zealand around the years of 2001 to 2007.
In New Zealand what we experienced in the later parts of 2007 was equilibrium. Equilibrium is when things begin to slow and settle. Prices have reached their limits, or beyond, and this period of time brings high prices and as a natural consequence less businesses move into, or expand in, the area. In this part of the cycle prices usually slow to a steady lever but this time because of the Global Credit Crunch we have seen a very short time in this area and fast movement into the next step in the cycle which is Decline.
Decline occurs as the demand for housing decreases, job growth stops and businesses begin to relocate to save money. During this time, prices become stagnant or even decline as rents and occupancy go down. Usually this decline is merely a slowing of the growth rate, but in markets where the rise was too fast the decline must result in a correction (decline) of prices which is what we have seen during 2008.
The market will then move into absorption. Absorption occurs as the lower prices and occupancy levels fall below the national averages and/or the area becomes attractive again to businesses looking to relocate. Usually in this time incentives are introduced by governments to encourage growth within the community.
I like to think of the market as a natural and living cycle that has laws that it has to follow. The easiest way to explain this is by calling the 4 cycles in the market a season. Just as nature has it’s seasons, real estate markets have a healthy way of transitioning from period to period. Sometimes depending on external factors such as warmer sea temperatures a season could be more violent. In the real estate market the same principle will apply. If there is an unusually high turnover of volume or higher than usual debt in the market this will affect how the next season performs. Experiencing these transitions and understanding them is very important and if your serious on property this will give you a huge leg up and will also help you as a home buyer or seller understand how they work so you can weather out the storms and relax in the warmer and rosier seasons.