Boom, bust and back again: Understanding the property cycle
Like clockwork, the property market goes through ups and downs, expansions and contractions, booms and busts.
It’s a cycle—predictable in hindsight yet elusive in real time. If that sounds a lot like the stock market or the economy as a whole, that’s because it is.
But how does the property cycle work? And how does it compare to the stock market’s cycle and the broader business and economic cycles? Let’s break it down with some real numbers, research-backed insights.
Four phases of the property cycle
The property sector moves through four distinct phases.
Recovery is when the market starts to pick up after a downturn. Vacancy rates decline, demand slowly returns, and investors begin sniffing around for bargains. This is when the brave (or well-informed) make their moves while everyone else is still licking their wounds from the previous downturn.
Expansion is when rents and property values climb, construction projects flourish, and developers ramp up supply. This is when the market looks unstoppable, and headlines scream “real estate boom”.
Hyper-supply is when the party goes on, but cracks start to show. Oversupply creeps in, vacancies rise, and rental growth slows. The smartest players start cashing in while the rest believe the good times will never end.
Recession points to the inevitable correction. Property prices soften, defaults increase, and the cycle resets. The fear index spikes, and many who bought at the peak, well, panic. But those who have been through this before? They’re already preparing for the next part of the cycle—and that is back to the recovery phase.
A tale of two cycles
While it’s easy to correlate the cyclical natures of both the stock market and real estate market, investors need to understand that they cater to different types of assets, appeal to different kinds of investors, and tend to move at varying speeds.
The property cycle typically spans 10 to 18 years, whereas the stock market cycle can complete in as short as four to seven years. Stocks react to macroeconomic events almost instantly, but real estate, being a slower-moving asset, tends to lag behind.
Take as an example, the 2008 global financial crisis.
The stock market nosedived immediately, with the PSEi losing by 48.3 percent and the S&P 500 shedding more than 50 percent from peak to trough. The real estate market, however, took a slower dive, with home prices in the U.S. hitting rock bottom only around 2012.
Here in the Philippines, while the stock market took a hit, the property sector remained relatively resilient, thanks to conservative banking regulations and strong remittances from overseas Filipino workers (OFW) keeping demand afloat.
Where are we now?
Looking at historical trends, the Philippine property sector has weathered various crises—the Asian financial crisis of 1997, the global financial crisis of 2008, and the COVID-19 pandemic.
Each time, it followed the same pattern: a downturn, a recovery, an expansion, then a correction.
As of 2024, key indicators show that we are in the late expansion or early hyper-supply phase. Office vacancy rates in Metro Manila were at 18.6 percent in Q3 2023, according to JLL, signaling oversupply.
Residential demand remains strong but is beginning to show signs of price stabilization rather than rapid appreciation. And while there may be cuts in the pipeline, interest rates remain elevated, affecting affordability.
The business cycle connection
The property cycle doesn’t exist in isolation; it moves in sync with the broader business and economic cycles.
When GDP is growing, businesses expand, demand for office space rises, and residential sales pick up as incomes increase. Conversely, during economic slowdowns, businesses scale back, office vacancies rise, and property prices soften.
For example, in 2019, pre-pandemic GDP growth in the Philippines was at 6 percent, fueling a strong real estate boom.
Then, the COVID-19 pandemic hit, causing GDP to contract by 9.5 percent in 2020—the worst in Philippine history—leading to a temporary property market slump. However, as the economy rebounded from 2021 to 2023, the property sector followed suit.
Lessons for investors and developers
Understanding the cyclical nature of real estate can help investors make smarter decisions. Here’s what to keep in mind.
Buy during the recovery phase—not at the peak of the expansion. If you’re investing for the long term, the best deals are found when the market is just starting to turn.
Pay attention to supply and demand indicators. High vacancy rates? Increasing supply? These are warning signs of an impending correction.
Leverage interest rate cycles. Real estate is a leverage-driven market. When rates are low, affordability increases, pushing property demand higher. When rates rise, demand slows. Keeping an eye on central bank policy can give you an edge.
Diversify. Not all property segments move in sync. While residential might be softening, logistics and industrial real estate could still be on the rise.
Act accordingly. Real estate, like the stock market and the economy, moves in cycles. The key is to know where you are in the cycle and act accordingly. History doesn’t repeat itself, but it does rhyme. The savvy investors, developers, and homebuyers aren’t those who try to time the market perfectly—they’re the ones who understand the cycle and position themselves wisely.
