Last week we looked at the business cycle and its impact on us as real estate investors. This week, we will consider two less well known, but nonetheless important economic cycles. These are the real estate cycles and the debt cycle.
The real estate cycle is the result of the economic impact driven by land speculation. The real estate cycle lasts about double the time of the business cycle but plays a noticeable role in real estate investing. Essentially, as land investors purchase land based on a speculation that its value will increase due to a limited supply, the cost of that land will in turn increase reducing the profit margins and appetite of developers to purchase the land to develop it. When it reaches the point where there is extremely low demand for land the value of the land will sharply decrease as land investors try to sell the land at a reduced price.
The third cycle is the debt cycle and it is a long-term economic cycle that has a major impact on the real estate market and economy in general once every 50 or more years. Essentially, as each business cycle passes, the overall consumer debt will increase by a noticeable amount when compared to that same place of the previous cycle. Across a number of cycles that debt level will build to an amount that is unsustainable by businesses and consumers leading to a large collapse or deleveraging of debt. The result is a strong economic downturn such as what was saw during the great depression.
As discussed in the previous article, the point of understanding the debt cycle is not to limit the times when we are investing but rather to be aware of the current situation we are in and to provide margins in debt levels, occupancies and required sell prices in order to be conservative in our assumptions.
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