The Rise and Fall of the Property Cycle

News Date: martes, 04 de agosto de 2009

Property News in Spain
Spanish Property News

Thankfully, we can now see this particular cycle of rise and fall coming to an end. Many found the impact of the fall and the collateral damage that followed, damaging both at home and in the office, but this cycle is not by any means new and the chances are that there will be more cycles in the time to come.

Whilst business is good and we are in the middle of a “rise”, usually GDP would be going up and people have the money to spend and invest so as money chases the assets and during the time it takes for those assets to increase, prices go up.

This cycle of bubble and bust in housing is drawing to a close. For many the ferocity of the bust and the collateral damage that followed was a shock, but bubbles and busts are not new; chances are there will be more.

If the cost of the asset is less than the available amount of credit, people who get involved, are making money from nothing, making the people involved more interested in the “playing the window” rather than the actual buying. This in turn makes more money available to compete for a now limited amount of assets, and that is the start of the rise.

Every time there is a “rise” the people who get involved the earliest, are the ones who make their fortunes, but they are in the minority; the real driving force of the “rise” are the people who got involved later down the line, and that is where the pyramid schemes come in to it, because for every winner in this game there has to be losers. Greed is of course being the main incentive, because at the start the maxim is “those who snooze loose, and then inevitably the fear will follow.

Unrealistic valuations play a big part in the inevitable fall that is to follow a rise. Firstly they manage to get someone to fork out the money, and then because they convince banks (and many others), to keep on supplying them with credit, which is the essential ingredient of the whole cycle, because when banks and creditors start lending money without a proper understanding of the market and value, this drives the cycle forward.

Trying to pinpoint or judge when the “fall” will happen is a difficult thing to do, but usually when the rate of increase starts to decline, that’s the time.

This repeated cycle creates no long term economic value, because so many have been encouraged to borrow and instead of investing the cash into a future investment strategies that would afford them the opportunity to pay back a loan, they instead spend the money on luxuries they didn’t need. This “waste” is how the whole cycle can destroy economic value.

The level of foreclosures doesn’t have any link to the end of the cycle, prices have to come down to the place the market re-starts, how long it takes and the financial ruins caused in the meantime are irrelevant to the inevitable progression of this long cycle.

One benefit from this is that historically there is a strong negative correlation between equipment investment and the massive mispricing in the market (creating real jobs rather than jobs in the public sector where most jobs have been created in the past 5 years)

Inevitably, the extent of this mispriced housing makes it more expensive to operate, so new jobs are created elsewhere, another reason why allowing this cycle to happen is complete lunacy.


Spanish Rental and Property News by TheSaraService.com News Desk

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