A Primer On The Real Estate Cycle Part 2

Understanding the Real Estate Market Cycle Can Help Make A Difference In Your Portfolio

By Akhil Patel – Ascendant Strategy

Publisher’s Insight: Two years ago I sent out a survey to Family Offices asking what they most wanted to know about when it came to real estate. The overwhelming majority said they wanted to understand where we are in the real estate cycle. Akhil does an excellent job explaining this second of a two-part article. The first Patriarch/family office I worked for created his wealth from understanding the real estate cycle. Avery important topic for real estate investors.

In the last issue of Family Office Real Estate magazine, I introduced you to the overall real estate cycle. I argued that:

  • real estate prices peak on average every 18 years following several years of booming activity, construction and speculation
  • far from being a modern phenomenon, the cycle had repeated since 1800 in both the U.S. and U.K. and more recently could be seen in most advanced economies, including Japan and Europe;
  • all major economic variables were affected by the real estate cycle? in fact, the real estate cycle was the economic cycle.

I provided a stylized diagram of the cycle, which I provide again below.

As the diagram illustrates, there are two expansionary phases and two recessions or slowdowns during the course of each cycle. The recessions are marked by the red shaded
The first, at the mid-point of the cycle, is typically less severe than the one at the end.

Why? Because the first half of the cycle does not involve a major speculative frenzy in real estate fueled by bank credit. As there hasn’t has been the build-up of leverage, the banking system remains stable and therefore it is easier to move economies out of recession.

On the other hand, by the end of the cycle investor speculation has gone over the top, and banks are fully exposed to the property sector and real estate prices that significantly exceed reasonable measures of fundamental value. At this point, the economy is more vulnerable to a downturn and, once it happens, it is much harder to recover from because the banking system has been badly damaged by the real estate collapse. This means that the economy is starved of the credit it needs and so downturn begets depression.


Common to the repeat of every cycle is the recurrence of several key variables or markers in a fairly set sequence. These have been analyzed by some of the great cycles analysts, including Homer Hoyt, Fred Harrison and Phillip J Anderson.

The table below sets out these markers in order. They involve the interplay of market rents, prices, construction activity, fiscal expansion, interest rates and bank credit.

See One Hundred Years of Land Values in Chicago (1933) by Homer Hoyt, The Power in the Land (1983) by Fred Harrision and The Secret Life of Real Estate and Banking(2008) by Phillip Anderson.

Out of the depths of the prior crash, a new cycle is born. Almost the first sign of the new cycle are rents starting to increase, even though the economy is in recession. Why?

Because the lack of sellers, availability of finance and depressed conditions pushes prospective purchasers into the rental market. Excess demand pushes rents up.

As the price of real estate is its capitalized rent, this in turn pushes the prices for established buildings up; eventually, with the price of available sites low, this stimulates building activity and the new cycle begins. This process plays out over a few years. In parallel, the banking system has been undergoing a major exercise to unwind all of the credit of the prior land boom but once this happens there is an expansion in lending activities. Credit growth fuels an economic expansion.

All of this played out in the U.S. in the first half of this decade. From then on, the housing market has been decidedly buoyant and credit has been flowing again. Once you have seen signs of this, the next thing to look for ? and only after you’ve witnessed the recovery and then expansion ? is the mid-cycle slowdown/recession.

This is where we are currently in the cycle and is illustrated with the yellow circle in Figure 1 above. I have consistently forecast for this to take place around the end of the decade.

Into the mid-cycle, the real estate market and prices tend to moderate or come down and transaction volumes stall.

While different cities and asset classes will experience the mid-cycle differently, all real estate investors, wherever they are and whatever they invest in, will likely have to contend with an economic slowdown (if not proper recession).

This is important to take into account in terms of your investment strategy. In a slow market you may not be able to sell at the prices you want, or your exit from an investment may be restricted. For family offices contemplating real estate deals now, you should be paying very careful attention to these details as you do your due diligence.


During the mid-cycle, you can expect the stock market to experience a bear market for a year or two. However, the stocks that will be relatively strong, and will lead the way during the second half of the cycle, will be real estate and banking stocks.

To engineer a recovery out of the mid-cycle, central banks will reverse their tightening policies.

Because the mid-cycle does not a sharp fall in the price of land, it will be more straightforward to get economies out of recession, leading to much self-congratulations among policymakers at their ability to “manage” the economy. Don’t believe the hype.

Expect this to be taking place during 2020/21.

Because we have the framework of the real estate cycle, we know that the mid-cycle will be an excellent time to be in the market snapping up good deals during the lowdown/recession. To prepare for the mid-cycle you need to ensure you have financial firepower available to you to move on opportunities as they arise.

After 2021, should history repeat, we should see the start of a booming real estate market. The strong years of the 2010s will be nothing like the boom to come.


By 2024, we’ll have hit the “winner’s curse’ phase, the final two years prior to the peak. This is when early investors should be ready to get out of the market rather than chasing deals at rising prices.

“By 2024, we’ll have hit the “winner’s curse’ phase, the final two years prior to the peak. This is when early investors should be ready to get out of the market rather than chasing deals at rising prices.”

It’s certainly not the time to load up on debt, although it will be in plentiful supply.

The characteristic of this part of the cycle is that speculation plays as much of a role in this boom as does business expansion, though standard economic data may not be able to distinguish between the two.

People have money and they want to spend it. And invest it in assets that they see as only growing in value. In this phase of the cycle, higher demand for real estate is more obvious; and land is more expensive to acquire, mortgages comprise an increasing proportion of the loans made by the banking system. And so the quality of a bank?s loan book is increasingly predicated on high real estate prices.

A characteristic of this phase is easy credit and relaxed lending standards. The regulations put in place after the last crisis to “prevent” the next one will have been fully undone by this point (this is something that the current U.S. regulators have started to do).

In response to a booming economy and runaway asset prices, the Federal Reserve will begin another tightening cycle. The yield curve will start to flatten and credit spreads will become tight. These are warning signs.

And at this time, the news will be about the “world’s tallest building” that will soon start construction.


Amid the land boom of the 2020s, one of the best signals of an imminent cycle peak will be the announcement of a major scheme to build humanity’s tallest/longest/deepest/grandest structure. An architectural and engineering marvel, you will be told.

The skyscraper is the simplest and most reliable indicator of a financial crisis and severe recession.

The economics of such buildings require three things – high land prices, lots of (cheap) credit and ego. You have to have a big ego to conceive of such a project; like the Tower of Babel, these are, more often than not, monuments to man’s hubris rather an exemplar of the efficient use of scarce capital.

The business case of such projects, however, rests on land being expensive, such that building up generates the necessary rental income to justify the cost of land. The higher the land price, the taller the building.

And finally, you need a backer with deep pockets. When credit is loose then you will be able to find a bank or consortium of banks willing to lend you the money.

Prior cyclical peaks have been marked by such buildings – such as the Burj Khalifa in Dubai (2010), One Canada Square in London (1991), the Sears Tower in Chicago (1974), or, perhaps most famously, the Empire State Building in New York in 1931.

Given construction timescales, such buildings invariably open during the subsequent economic depression and their owners struggle to find tenants and so remain partially vacant for several years.

I use a basket of around 40 indicators to track each phase of the 18-year cycle but the main phases are easy enough to spot if you know what you’re looking for. It’s important to do this because it is difficult to get caught up in the euphoria and emotion of the boom years. The coming boom will be the biggest of all time, with more wealth created in the next decade than in any equivalent period in human history.

Furthermore, by the time we reach 2026, the forecast date for the next cyclical peak, no one in the world under the age of 40 will have much professional memory of the 2008 crash. So it would be no surprise to hear a newly minted thirty-something billionaire declare that real estate prices will never go down.

When you hear that, you?ll know what is about to happen

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