The economy regularly goes through economic cycles from so-called boom times to bust or low times. These can vary in length and average around five to seven years. The cycle is sometimes referred to as the economic clock where the high is 12 o'clock and the low 6 o'clock.
Wednesday, February 23rd 2005, 4:05AM
by The Landlord
Observation of past property cycles leads to the conclusion that markets repeatedly go through a cycle. In its simplest form it is: high, slump, low, recovery, high, slump, low, recovery. Good times are always followed by bad times and bad times are always followed by good times. What varies from cycle to cycle is the intensity and the time between peaks, whether high or low. There are often false starts between major peaks. This pattern is so well established as to be labelled predictable, it's not a matter of if the boom will end, just a matter of when and how suddenly. Likewise, it's not a matter of if the recession will ease, but when and how firmly the following rise will take hold.
Experienced investors know that the market always turns, it just doesn't feel as if it will. (Olly Newland's book The Day the Bubble Bursts provides more detail about this and records his experience as a property investor through more than 40 years of economic cycles.)
Residential and commercial property values react differently during market booms and slumps. Commercial investments, because of longer-term leases and arrangements in place, tend to be less sensitive to housing cycles and ride them out. However, a housing boom (and the slump which usually follows) can affect lender confidence, which can flow through into commercial lending.
Banks and financiers get caught up in the excitement of boom times and their behaviour during market changes can have a significant effect on you as an investor. As values rise in the boom, lenders compete for a share of the extra loan business. In a buoyant market banks will loosen their lending criteria and lend to weaker borrowers. They'll grant more high-risk loans based on optimistic income and valuation predictions and approve higher loan-to-value ratios.
