Understanding the pace of the market cycles can be a helpful tool when deciding to purchase or sell your real estate.
Investors, owners, potential buyers, and real estate agents alike have been keeping both eyes on the shift in the Metro Vancouver market as of late. 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 towards market cycles in general: what they are and how they work.
While no two market cycles are made alike, understanding a typical cycle can help owners maximize returns by making informed and well-reasoned decisions.
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 of British Columbia 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?
One of the largest impacts on these established market patterns has been due to the speed with which information is reaching consumers. Today’s buyers are increasingly well-informed, with access to a large and diverse amount of information that allows them more sophistication in decision making. Because there is a near instantaneous distribution of information via mediums like social media, market sentiments and activity can change at a faster rate based on headlines and chatter.
The result of this is shown in the numbers: in the form of an acceleration in both velocity and amplitude of the ups and downs. In many ways, the information explosion is both 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 gossip effect can lead to reactivity and result in over-pronounced enthusiasm or pessimism. When the landscape is shifting so rapidly, there is more pressure to make quick and reactive decisions out of fear. The unfortunate 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 mention the ‘seven-year cycle’ in real estate, while other research concluded that the average real estate cycle span is more like 18 years. With the continued increases in the speed of the market cycle, it’s no longer accurate to talk about the Real Estate market in these ways.
We are now in an era that is much closer to three-year cycles as a result of the volume of information available and the rate of its dissemination. In today’s marketplace, 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 your chosen reaction to them. Now, reactions are immediate.
One example of the increasing speed of market cycles can be seen in comparing the dot-com crash with the past year. After the stock market bubble burst in the United States at the end of the 1990s, stock valuations dropped by over 40% over the course of three years. The S&P 500 shrunk roughly 20% to its year low in May 2022, more than half of the drop of the entire dot-com crash in only 5 short months.
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, reactionary decisions as buyers and sellers try to avoid market ‘FOMO’. To combat this fear-based decision-making, it’s crucial to take in an informed and 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 been proven over time that the right product for the right home-buyer will always sell, regardless of the pace of market cycles.
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