Understanding the effects of a housing market shift

Investors, owners, potential buyers and real estate agents alike have been keeping both eyes on the shift in the Metro Vancouver market. While the real impact of these shifts can be a divisive and difficult thing to ascertain, anyone seeking to better understand the effects of market changes should turn their attention toward market cycles in general and what they are and how they work.

While no two market cycles are alike, understanding a typical cycle can help you maximize returns by making informed and well-reasoned decisions.

What is a market cycle?

In real estate, a textbook market cycle is made up of four main phases: Recovery, expansion, hyper supply, and recession.
Recovery: During this phase, market growth is stagnant, with limited housing starts. This presents opportunities for investors to keep an eye out for any signs of advanced recovery and to jump on below-market value properties.

Expansion: The next phase in the cycle consists of strong economic growth and an increase in demand for housing as the economy improves. Buyers also start to gain confidence, which leads developers to create properties that can be sold at a higher market value.

Hyper supply: A market may experience this when the housing supply exceeds buyer demand. This is typically a result of developers and investors trying too fervently to increase the supply when demand is high.

Recession: The final phase means that supply has exceeded demand by a wide margin and there are high vacancy rates.

It’s important to note that not every market follows a classic market cycle and is dependent on several external factors including government policies, socio-economic factors, demographics and technology. For example, we know that the Lower Mainland has suffered from a decades-long period of under-supply in housing. This means that our market may be less prone to the hyper-supply phase of market cycles.

What has changed in recent cycles?

The speed in which information is reaching consumers has had a large impact on established market patterns. Today’s homebuyer is increasingly well-informed, with access to a large and diverse amount of information. Because of the quick distribution of information via social media and the internet, market sentiments and activity can change at a faster rate based on headlines and chatter.

The result of this is reflected in the numbers when you look at the acceleration in velocity and amplitude of the ups and downs. In many ways, the information explosion is a blessing and a curse to the real estate industry. Homeowners and buyers can stay informed and make the best decisions for themselves. However, the sharing of information can lead to reactivity and result in over-pronounced enthusiasm or pessimism. When the landscape is shifting so rapidly, there is more pressure to react quickly out of fear. However, the reality is that without time for deep consideration and understanding, unintended consequences can sneak in.

What does a market cycle look like today?

In the past, industry insiders often mentioned the ‘seven-year cycle’ in real estate, while other research concluded that the average real estate cycle span is more like 18 years. But with the continued increases in the speed of the market cycle, it’s no longer accurate to talk about the industry in these ways.

We are now much closer to three-year cycles as a result of the volume of information available and the rate of how it is distributed.

Geopolitics have become not only relevant to the conversation but extremely important. Overnight news now has an immediate impact. In the past, troubling economic news would occur overseas, and there would be time to contemplate its potential consequences and how you react. Now, reactions can be immediate.

With the speed of market changes moving at an increasingly brisk pace, it’s becoming easier to be caught up in ‘hype’ or to make snap decisions as you try to avoid market ‘FOMO’. To not get caught up in this fear-based decision-making, it’s crucial to take in a fuller, more holistic view of the market.

Understanding the pace of the market cycles can be a helpful tool when deciding to purchase a home or invest in real estate. However, it has proven over the years that the right product for the right homebuyer will always sell, regardless of the pace of market cycles.