How to recognise, prepare for and profit from the property cycle
3. How to profit from the property cycle: dos and don'ts
So we've looked at why there is a property cycle, and we've explained each stage of it, so you probably have a good idea of how far along we are and you can make predictions on what will happen in the next few years. Our final article looks at how you can use the 18-year property cycle to make the right investments, and ultimately make money.
It's up to you whether you choose to believe the 18-year property cycle theory and we encourage you to do your own research, but it's worth serious consideration, whatever the size of your portfolio and however far you are along the property ladder.
We know that property prices are cyclical and prices will continue to rise in the long run, despite the slumps. In London, property prices tumbled in from an average of just under £300,000 in 2008, but were back to this price in 2012 and have been steadily rising ever since.
By using Harrison's theory, we could arrive at the conclusion that we are currently experiencing a mid-cycle wobble, before prices continue to rise, finally crashing down in around four to five years from now. However, as we've pointed out before, it's not an exact science but we can, and should make our own predictions about where the property market will go next.
So, things might start to look a little bit clearer now. As every cycle starts at a higher point than the last one, you can see that house prices will always rise in the long run, so the buy-and-hold strategy will always work, despite market fluctuations (especially in London). The media might have you believe that it is much worse or better than it is. Step back and look at the bigger picture...
DO: buy at rock bottom when everyone is frantically selling. Properties will be going at a discounted rate; look out for repossessions and quick sales at auctions. However it will be hard to get a mortgage at the very start of the crash, so if you can't access a loan in the early days, hold on because banks will start lending well before prices start to rise again.
DON'T: follow the headlines. Lots of media reports use figures extrapolated out of proportion. Take things in context. If you're seeing lots of reports about new large developments, such as skyscrapers, keep an open mind - a boom comes before a bust.
DON'T: sell your property through blind panic when prices fall, but do prepare for it. You might get void periods or arrears as the economy takes a hit, but be patient as things will return to normal. It's a temporary blip.
DON'T: lose your head during the explosive phase. Don't remortgage when your property price shoots up just to spend the extra money frivolously, because chances are you'll be overleveraging now and will be forced to sell later in the inevitable downturn. If you do remortgage during the winner's curse phase, keep the money to one side for discounted properties when the crash hits, or to use if there are difficult times ahead.
DON'T: wait until the next slump to buy a house, because you could be waiting a while and losing out on some vital profits in the meantime.
DO: sell during the winner's curse. It's a great time to make a decent profit on any properties from your portfolio that are underperforming, as people are willing to spend silly money on properties without thinking. You could also sell everything: then use the money to buy properties in different locations that are at different points in the cycle.
DO: your own research. Rather than look at London or the south east as a whole, divide it into microcosms and study prices over time by sections of towns and even individual roads. You'll notice that different areas are at different points in the cycle, and you can base your predictions on your own research.
DON'T: do what everyone else is doing. Do the opposite. Market psychology is often irrational and driven by greed and fear. As Warren Buffett said: "Be fearful when others are greedy and greedy when others are fearful."
Don't underestimate how much human emotion drives the market. It's more powerful than logic, and it is well documented that it is a sentiment that leads to boom and bust. Be rational.
That should give you some food for thought when it comes to making your next investment decisions. By looking at some of the signs around you at any given time, you can guess where we are in the cycle and then make an educated guess at where things are going to go next. At some point in your lifetime, property prices will fall, so it's important that you are prepared when they do.
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.