Understanding property cycles in

a residential market
Richard Reed
Deakin University, Burwood, Australia, and
Hao Wu
University of Melbourne, Melbourne, Australia
Abstract
Purpose This paper aims to review property cycle theory and the relevance of the larger body of
knowledge about cycles with reference to the housing market. It also aims to highlight the lack of
research into property cycles in the residential sector on a suburb or smaller region basis, as well as the
potential for increased knowledge about cycles to assist to avoid housing stress.
Design/methodology/approach The paper conducts a literature review of previous cycle
research and encourages the use of cycle theory. It discusses the established body of knowledge about
business cycles and the ofce market sector, as well as investigating levels of housing affordability
and how detailed knowledge about property cycles can assist to decrease housing affordability in
residential areas, which will eventually experience a downturn.
Findings It is argued that an increased level of certainty about cycle behaviour in particular
suburbs will give households a higher level of condence when considering whether and when to enter
the market. Property cycle research has the potential to assist low-income homeowners to better
understand the characteristics of cycles and associated risks in each residential.
Research limitations/implications This is a conceptual paper and has conducted a review of
cycle research and housing affordability in certain countries. Some areas or countries may be affected
to varying degrees by property cycles and levels of housing affordability.
Practical implications In extended periods of high volatility it is argued that a better
understanding of housing cycles will allow more homeowners to avoid negative equity and the stress
associated with repossessions. Property cycles are unavoidable although there is typically relatively
little information available in the open market about the timing and amplitude of cycles in individual
areas.
Originality/value This paper is unique as it highlights the potential for property cycles to be used
to avoid housing stress in the residential market. Traditionally cycle research is used to increase
returns and avoid downturns in the ofce and/or business sectors.
Keywords Housing, Property, Residential property, Stress
Paper type Conceptual paper
Introduction
Even though it is generally accepted that property cycles are a common occurrence in
established housing markets, knowledge about their individual features for individual
areas (e.g. suburbs) is not commonly available or discussed. Even though it makes a
sound nancial decision to buy a home when the housing cycle is in a downturn (i.e.
before it reaches the bottom and then rises) and sell when the housing market is rising
(i.e. prior to reaching the top of the market and falls), the cycle characteristics of each
type of suburb is not known. For example does a suburb have only one cycle or
multiple cycles? Furthermore what is the length of each cycle and what type of suburb
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0263-7472.htm
Understanding
property cycles
33
Received July 2009
Accepted October 2009
Property Management
Vol. 28 No. 1, 2010
pp. 33-46
qEmerald Group Publishing Limited
0263-7472
DOI 10.1108/02637471011017163
are the cycles associated with? This is a starting point for using proven cycle theory in
the housing market analysis.
Although government policy has been focused largely on maintaining and
protecting household income levels, surprisingly there has been relatively little
attention given to the other side of the housing equation, namely the risks associated
with homeownership. A closer examination of future house price levels has two main
benets for assisting housing affordability. First, households will have a higher level of
condence to enter the housing market if the value of their house is unlikely to decrease
in the future, which in turn reduces exposure to downside risk. This also applies to
households, which have the option of renting or buying where the latter has benets
for wider society. Second, households which have very limited income will be able to
enter the market without fear of their mortgage debt exceeding the market value of
their home.
The key to identifying areas with changing property value is to monitor house
values and accurately identify their respective cycles. This awareness of the
co-movement and variance of house values across locations or suburbs is essential for
making informed micro and macro-housing policies. The paper commences with a
review of the general theory of property cycle and its relevance to mature housing
markets. In extended periods of high volatility it is argued that a better understanding
of housing cycles will allow more homeowners to avoid negative equity and the stress
associated with repossessions.
Housing stress and affordability
Housing stress and housing affordability are increasingly important considerations in
cyclical markets. In comparison with other developed countries listed in recent
international housing affordability surveys (Cox and Pavletich, 2008; Cox et al., 2009),
Australia suffered the highest housing stress with an overall median multiplier of 6.3
(see Table I). This was in direct contrast to Canada (3.1), the USA (3.6), Ireland (4.7) and
the UK (5.5), even though the accepted affordability standard itself is normally 3.0.
Also conrming the decreased level of housing affordability in Australia was the
ranking of Australian capital cities in global top-50 list of least affordable housing
markets as follows: Sydney (11), Perth (19), Melbourne (22), Adelaide (35) and Brisbane
(36). This decline in housing affordability, being the ratio between the cost or value of
Affordable
(3.0 and
under)
Moderately
unaffordable
(3.1-4.0)
Seriously
unaffordable
(4.1-5.0)
Severely
unaffordable
(5.1 and over) Total Median
Australia 0 0 3 24 27 6
Canada 1 15 5 4 34 3.5
Ireland 0 0 2 3 5 5.4
NZ 0 0 1 7 8 5.7
UK 0 0 6 10 16 5.2
USA 7 59 23 16 175 3.2
Total 8 74 40 64 265
Source: Cox et al. (2009)
Table I.
Housing stress for
households and
individuals
PM
28,1
34
housing and income, has directly contributed to high levels of housing stress in capital
cities in Australia.
When the problems associated with housing stress are converted directly into the
number of households, it is evident that many Australians are directly affected.
According to Mission Australia (2008) over 400,000 lower-income households are
paying more than half of their income for housing which has obvious created or
continue housing stress which is currently at record level (Gordon, 2008; AHURI, 2009).
Between 2001-2006 the level of housing stress in Australia has continued to increase
(see Table II), where lower income group and indigenous Australian households are
particularly affected by the current affordability crisis. Many Australian households
have been ofcially in housing stress with more than a third of family income required
to service the average home loan (Klan, 2006). For example NSW homeowners spend
36.4 per cent of income on mortgage repayments with homeowners in Queensland and
Tasmania at 34.9 and 33.3 per cent respectively.
Clearly housing affordability is not a new issue and there have been many previous
attempts to address this long-term problem. Monitoring medium to long-term house
price changes coupled with the ability of the society to gain access to affordable
housing have been priority areas for government policy (Marks and Sedgwick, 2008).
There are clear issues for existing government policy, which is now facing severe
problems as it seeks to ease housing stress in Australia. The global nancial crisis has
unfortunately placed even further pressure on housing affordability. Lower housing
affordability by Australian homeowners also has a ow-on-effect, since additional
pressure is placed on the private rental market where many households can neither
afford homeownership or access public housing (Darby, 2005). With reference to
renting at least 600,000 families and singles in the private rental market face housing
stress as they pay more than 30 per cent of their income in rent, which represents 65 per
cent of lowincome private renters (National Shelter, 2009). There have been attempts to
examine the impact of rental increase on housing stress levels in different Australian
states (Vu, 2008), although clearly this is a widespread national problem.
Cycles in market economy
It is possible to conduct neo-classical analysis of Australians housing markets given
the comprehensive data available. The challenge is that housing markets, except
2001 2002 2003 2004 2005 2006
All
Household 10.6 10.9 11.2 11.5 11.5 12.3
Individual 8.7 9 9 9.4 9.3 9.9
Owners
Household 5.3 5.4 5.6 6.1 6.4 8.1
Individual 4.8 4.8 5 5.5 5.9 7.2
Renters
Household 23.9 24.4 25.3 24.8 24.3 23.1
Individual 20.1 21.6 21 21.4 19.9 18.4
Source: Marks and Sedgwick (2008)
Table II.
Housing stress for
households and
individuals
Understanding
property cycles
35
residential investment property, are subject to government social policy intervention.
To balance the investment end and the social end of the housing market, a general
theory of property cycle is required a combined framework of property cycle theory
and the theory of state intervention. The theory has been slowly developed in
mainstream economic theory and its modern extension (e.g. NIE and the Behavioural
School) or competing theories (e.g. neo-Marxian theory). Empirical evidence has been
drawn from urban land markets (Hoyt, 1933), residential markets (Case and Shiller,
1989, 1994) and commercial property markets (Ball et al., 1998). More recently, the
theory has been formalised and symphonised mainly based on commercial property
markets (Ball et al., 1998; RICS, 1999).
Cycle theory is one of the basic human observations of the natural world as well as
in human societies. It is dened by the Dictionary of Theories as events, economics
and political systems move through cycles similar to the natural life-cycles of living
beings (Bothamley, 2002, p. 133). Being a subset of the market system, the level of
house prices can be studied and explained in a way that is consistent with how the
stability of the entire system is studied. Leading economists such as Mitchell (1927)
and Sherman (1991) dened the business cycle as a phenomenon found typically in a
market economy and not observed in a pure planned economy. The character and
importance of the market system and the pricing system has been demonstrated
extensively in the literature with competing evidence and theories being introduced
(Friedman, 1981). The history of modern society is where each market system is
continuously seeking to identify the balancing point or equilibrium (Samuelson
and Nordhaus, 2001). As Schumpeter (1939, preface) explained: analysing business
cycles means neither more nor less than analysing the economic process of the
capitalist era.
The two volumes of the business cycle study conducted by Mitchell and Burns
represented one of the most comprehensive attempts in the twentieth century to
examine cyclical uctuations of a market economic system. The concept and the
working plan were developed in the rst volume (Mitchell, 1927), which was used to
form the working denition for the study in the second volume (Burns and Mitchell,
1946) and to establish the methodology for investigations into business cycles. Its
denition serves as an explanation of the measurement and analytical approach which
is equally valuable for the property cycle study:
Business cycles are a type of uctuation found in the aggregate economic activity of nations
that organize their work mainly in business enterprises: a cycle consists of expansions
occurring at about the same time in many economic activities, followed by similarly general
recessions, contractions, and revivals which merge into the expansion phase of the next cycle;
this sequence of changes is recurrent but not periodic; in duration business cycles vary from
more than one year to ten or 12 years; they are not divisible into shorter cycles of similar
character with amplitudes approximating their own (Burns and Mitchell, 1946, p. 3).
Property cycles
So far most of the research into property cycles has been limited to the ofce market
sector. Earlier studies by Pyhrr and Born (2006), Pyhrr et al. (1989, 1999), Barras (2005),
Barras (1983, 1994), Dipasquale and Wheaton (1996) and Ball et al. (1998) offered a
comprehensive treatment of the concept and key dening characteristics of commercial
property cycles, e.g. re-occurring uctuations, non-periodic uctuations (irregularity),
PM
28,1
36
identical patterns of co-movement, strong links to the general economy, such as the
four to ve year classic cycles, the nine to ten year long cycles, the 20-year long swings
and the 50-year long wave, strong links to the capital market (primarily capital value
variation driven), building lags against business cycles, geographical and economic
condition dependent, strongly inuenced by structural settings, and strongly
inuenced by expectation including speculation. Other studies examined the general
concepts of the property cycle and its relationship to business cycles (RICS, 1999; Key
et al., 1994a, b, c; Estates Gazette, 1995, 1996). Recurrent but irregular uctuations in
the level of all property total returns are also apparent in many indicators of property
activity, but with varying leads and lags against the all-property cycle (Key et al.,
1994c). This denition is much less rigid than those dened in the natural sciences, and
yet it covers the cycle phenomenon in property markets more comprehensively which
is close to observed market behaviour. More rigidly constructed denitions of property
cycles are usually for the purpose of market forecasting using mathematical models, or
empirical testing of historical data. The MIT urban economist William Wheaton
dened a property cycle as:
. . . a more restrictive denition of a real estate cycle involves repeated oscillations of a
market, as it continually overshoots and then undershoots its own steady state . . . real estate
cycles are dened as some degree of instability in the market whereby a single economic
shock leads the market to oscillate around its steady state for some number of iterations
(Wheaton, 1999, pp. 217-8).
Wheatons empirical studies (Wheaton, 1987; Wheaton et al., 1997) are an extension of
his denition of property cycle. However, there is a common omission in most property
cycle denitions of what the cyclical patterns attempt to describe (Baum, 2001). Indeed,
property markets are a complex system and property cycle represents a group of
interacting forces (Hoyt, 1947). Previous attempts to dene cyclical behaviour in
property markets from different perspectives have created confusion and controversy.
The complexity of property cycle theory can be found in Pyhrr et al. (1999) and Pyhrr
and Born (2006), which discussed property cycles from micro, macro and managerial
angles. The same approach of classifying property cycle theories has been adopted in
Wernecke et al. (2004) to study property cycles in Germany.
The perspectives argued in academic papers such as Pyhrr and Born (2006) and
Pyhrr et al. (1990), and practical papers such as PWC (1999) and RREEF (2006), are
such where property cycle theory is largely a strategic-game-based investment theory
that links the problem of asymmetric information and politico-economic
decision-making that is critical to investor-government, investor-investor,
occupier-government and government-government relationships. From an investors
perspective it is also an individual entity, such as an individual, a rm or a government
body, which evaluates and makes decisions against general market movement. As
Pyhrr et al. (1999, p. 27) concluded, real estate cycles are relevant and will become a
more important decision variable for investors and portfolio managers in the future.
Although this view is dominant in academia and practice, the policy aspects of the
theory is unclear, as market conditions and structure both changes in a way not easy to
predict.
Understanding
property cycles
37
Theory and analysis
Most boom-bust cycle theories are not theories in their own right because major
events that directly trigger major cycles in property markets are often explained by
irrational human or crowd behaviour (Stoken, 1993; Shiller, 2005). However, the way
the theories are linked to the reality is unclear, given the limited knowledge about the
complex modern society and the even more complex relationship between physical and
human environments. There is a distinct need to identify these links. Among popular
explanations of the property cycle it is generally accepted that property markets
behave cyclically in the long run, primarily due to building lags in relation to demand
changes for space which are mainly driven by the uctuations of business activity. The
conceptual model as developed (Barras, 1983, 1994, 2005, 2009) explains the process in
a modern market system (see Figure 1). The links between the general economy and
the sub-markets of space is at the core of this theory.
Changes in general economic activities affect the households, rms and other types
of entities, which in turn affect the effective demand for space. This gives a signal to
property developers to supply new space. On the other hand the lengthy process for
space development creates delay or mismatch in relation to changing market demand.
The lag between building demand and supply has become one of the most popular
reasons for property cycles in the building cycle theory; the Barrasian building cycle
model is largely based on the UK market, which might limit its explanatory power in
economies with different social infrastructures. Barras (2005) extended the treatment of
lags in building cycle theory into each of the submarkets where the lumpy nature of
property markets is related to lags in various adjustment processes; namely user
response to change of rents, builder response to demand changes, and typical building
lags. The timing for delayed land development is also an important source of property
cycles (Grenadier, 1995).
One of the key characteristics is their long lifecycles in relation to depreciation in
both physical and economic terms. Thus the imbalances between physical and
Figure 1.
How the building cycle
works
PM
28,1
38
economic depreciation almost certainly has an impact on property development and
occupancy behaviours and market stability. The ltering process examined in
Robinson (2002, 2005) for tenants to move from lower grade to higher-grade ofce
buildings during an economic downturn as market rent drops, and vice versa, is
reected in the volatility of vacancy rates in the lower grade ofce sector. In other
words, the physical and economic depreciation of buildings in relation to user
behaviours may either enhance or reduce the amplitude of property cycles. Baum
(1991) examined this issue and showed the importance of integrating building
depreciation and the supply lag in property cycle theory.
It seems that Says Law, notably where goods and/or services and associated costs
of production equal total demand, may only be suitable for an ideal socio-economic
situation where the growth of different sectors that form the society is in a balanced
form (Liu, 2003). The typical treatment in dealing with property cycles is focused on
over-supply of or over-investment into space market as measured by consequential
changes in rent and values, returns and vacancy rates. It was also argued that neither
over-supply nor over-investment really mean that supply has surpassed effective
demand. It only means that investments in specic sectors are unbalanced where
investors expect higher prot and leave supporting sectors under-resourced (Rothbard,
1963). Rental and aggregate space supply, do not have direct connections (Key et al.,
1994a) because oversupply is an imbalance of space types which will not directly affect
the real demand of certain building types or their rental levels.
The nature of prot is the return or the opportunity cost that property investors
require, to justify the risk they take, in organising development or investment
activities. When market conditions are stabilised with the increased uncertainty in the
space demand-supply interplay, it lowers the real risk by reducing associated
transaction costs. In theory, the average prot or return margin for property
development and investment should be reduced because the operational models and
conditions for successfully running the system can reduce the risk margin. However,
this cannot make players voluntarily lower their prot margin, given that the existing
economic structure also tends to maintain this order. The leads and lags of technology
upgrade or knowledge advancement are often affected by the social return of the
economic system. If the margin is not achieved then the incentives will be reduced and
subsequent production is likely to be delayed.
The imbalance of information required in the efcient operation of modern
economic systems represents one of the main market defects that can cause instability
of the demand and supply conditions. In the case of property development, although
building construction is not as abstract and sophisticated a task as a nuclear physics
experiment it requires high-level division of labour and various types of knowledge in
coordinating factors in production such as land, building material, building design,
capital and information over time and space. Making all of these factors work in
building development projects in an efcient way is beyond individuals capacity in a
world of uncertainty. For those who take these tasks seriously, the risks are normally
high and therefore more likely to exacerbate the problem of asymmetric information to
affecting property cycles.
Theory-based modelling, time-series analysis and market forecasting are the most
dominant forms of property cycle analysis over the past two decades. These
approaches are made possible by the availability of good quality time-series data with
Understanding
property cycles
39
the support of computer-based modelling tools. Modelling property cycles has been
reviewed in detail in Ball et al. (1998) based mainly on US and UK literature. The US
property market has been extensively modelled at the national level (see Wheaton,
1987) and at city or local levels (see Pyhrr et al., 1996). The UK property has been
studied extensively (Wheaton et al., 1997; RICS, 1999; Farrelly and Sanderson, 2005;
Scott and Judge, 2000). More recent progress in modelling property market cycles
include (Wheaton and Nechayev, 2008; Barras, 2005; Wheaton and Simonton, 2007),
although modelling emerging markets still remains a major challenge (Wu, 2009).
Property cycle in a general equilibrium framework
One of the prime motivations for business cycle studies is to understand the unstable
nature of the market mechanism. This is also the case in property cycle analysis. At the
core of the enquiry into market mechanism is the notion that a self-interest driven
economy based on perfect competition is able to achieve an efcient allocation of
resources and a fair distribution of welfare. One of the most inuential theories
designed to deal with this concern is general equilibrium theory. General equilibrium
theory validates the power of the market mechanism hence the legitimacy of modern
market system as a preferred resource allocation system. The business cycle theory
and the general equilibrium approach should both be derived from a common
foundation, namely free market system. Similarly, there should not be a major conict
between property cycle theory and general equilibrium principles in commercial
property market systems. Perhaps the only problem is that the classic general
equilibrium theory is naturally an ideal market system with zero transaction costs,
hence makes limited concern of the non-market force in affecting market demand and
supply. In the condition of imperfect property markets, perhaps it is unwise for
property cycle analysis to ignore the states role in affecting supply and prices.
Black (1995) attempted to identify and draw together various competing theories
under the single umbrella of general equilibrium. Rather than introducing various
factors he suggested that business cycles could be analysed under the equilibrium
framework. This approach makes sense because the subject matter, namely market
fundamentals and non-market elements under state-market interplays, remain
unchanged. Although some analysts emphasise the impact of state control in
business cycles or property cycles, it does not change the fact that the general
equilibrium framework can be used as a tool to explore such circumstances. Put simply
business cycle theory and mainstream economic theory should not be deconstructed
when dealing with market demand and supply. The basic drivers of the market system
determine economic choice making, preference and so forth, which set the mechanism
of property cycles. In many cases, it is an effective way to use a simple approach or
model to deal with a complex issue. General equilibrium principles look simple and
elegant in its unrestricted form (Black, 1995) yet it is very effective in explaining the
basic market forces and associate phenomena such as market cycles. North (2005) also
recognised the challenge for developing a dynamic theory of changes that is
comparable in elegance to the general equilibrium theory.
Arguably there is no role, however, for government in general equilibrium theory
because it is essentially a theory to justify the power of the invisible hand or the
mechanism of freedom in allocating resources and welfare distribution (Hicks, 1946;
Samuelson, 1983). As Samuelson and Nordhaus (2004) suggested, all
PM
28,1
40
partial-equilibrium processes occur simultaneously and all the processes of supply and
demand, of cost and preference, of factor productivity and demand are really different
aspects of one vast, simultaneous and, interdependent process (Lindblom, 2001).
Although mainstream theory recognises the imperfection of the real world and the
essential role played by the state, it is not at the core of mainstream economic analysis.
It is clear that the modern competitive market alone can give rise to major social
problems; state and other organisations have been engaged to play inuential roles in
the property sector both in the past and the present. The weakness of the general
equilibrium model in matching actual market evidence requires it to be expanded
further with the support of new economic theories about institutional changes and the
states role as an integrated part of the system. The new institutional economics, as
well as Keynesian macroeconomic theory both contribute in this regard. Standard
property cycle theory suggests a number of causes for property cycles with various
lengths. Property cycle theory also supports specic techniques such as time-series
decomposition to analysing property cycles. Thus it is important to examine the link
between property cycle theory and the general equilibrium approach, because ideally,
all standard theories used to explain market stability needs to be consistent with the
rened equilibrium framework.
Housing cycle and housing bubble
The classic treatment of housing market dynamics is on its level of efciency
(Gatzlaff and Tirtiroglu, 1995; Case and Shiller, 1989; Keogh and DArcy, 1999) and the
stock/rental adjustment processes (Dipasquale and Wheaton, 1994; Gabriel and
Nothaft, 1988; Read, 1988; Wheaton, 1990). Current theory of uctuations in residential
markets typically concerns housing bubbles which are unsustainable price surge
that do not t with societal fundamentals (Black et al., 2006; Case and Shiller, 1994;
Glaeser et al., 2008). Some paid tribute to speculative behaviour (Shiller, 2005;
Malepezzi and Wachter, 2005). Recent concerns about the severe housing price problem
includes the housing crisis that is commonly known the subprime crisis (Wiedmann,
2006; Shiller, 2008). The study of business cycle, property cycle and more specic
issues such as price bubble is closely linked to the advancement of economic theory
and theories in other related elds. Identifying bubble and measure or testing the
existence of bubble can be a major challenge. Within the general property cycle theory
the behavioural foundation of bubble phenomenon can contribute a great deal to the
understanding and the modelling of property markets. The study of the irregularity
and risks about property markets over time is associated to the study of the
psychological foundation of price bubbles and it is even more critical a factor in
studying cycles in emerging or immature markets.
The same argument is equally valuable in a housing cycle study when considering
affordability issues. Overall the nature of property markets suggests its lack of
efciency so that individual behaviour (e.g. decision-making) and interactions (e.g.
games) play an important role. In reality this is reected in the general publics view on
the eld of real estate and its associated professions i.e. speculative people and
organisations. Similar to commercial property research, housing prices are subject to
cyclical uctuations, e.g. three-year cycles in an urban property market. Furthermore
housing investment also contributes to property cycles (Jud and Winkler, 2003; Jud,
2003). Recently the social behaviour is found to be an important basis for
Understanding
property cycles
41
understanding housing markets (Meen and Meen, 2003; Meese and Wallace, 2003).
However housing cycle theory is linked to demographical conditions and changes in
conditions of a society at aggregate levels hence often contain higher complexity than
the theory of commercial property cycles.
Signicance of housing cycles at local level
Housing price movement or cyclical uctuations at the city level is much studied (Tse
et al., 1998; Wheaton, 1985; Hui and Lui, 2002; Macfarlane, 1998). On the other hand, the
movements of prices at local level is not much studies perhaps due to a lack of data that
are consistent, of good quality and covering time period of sufcient length. The
dynamics of city housing market is much related to the conditions at this sub-market
level. Without an understanding at this detail level, cyclical behaviours that are
observed at city, provincial or national levels seem sometimes to lack of theoretical
foundation or practical signicance.
Investigation of property cycles at this level, however, faces several challenges:
.
there is an underlying assumption that each suburb or local area can be
grouped to reect a relatively separated residential property market (there is a
lack of theoretical support for this assumption);
.
relatively low level of number of transactions to validate aggregate claim;
.
second homes or investment homes sometime are difcult to be separated to
others which reects a different level of behaviour at both micro and aggregate
levels; and
.
unlike commercial property markets where a less regulated but highly unied
market structure exists, local housing markets are subject to various policy
controls and typically affected by local councils and planning authorities, which
easily distort results from comparison.
Nonetheless these previously mentioned challenges should not undermine the
importance of understanding cyclical behaviours of local residential markets,
especially at the time when the housing markets are subject to greater uncertainty due
to economic climate changes, asset market conditions (e.g. the credit market and
lending behaviour) and demographical changes such as migration as well as
governments response in forms of policies and regulations.
Conclusion
This paper reviewed property cycle theory and the relevance of the larger body of
knowledge about cycles in other applications with reference to the housing market.
Although business cycles are linked to commercial property cycles in established
market systems, there is less research undertaken into property cycles in housing
markets on an individual area basis. Property cycle research has the potential to assist
low income homeowners to better understand the characteristics of cycles and
associated risks in each residential, although traditionally most of the focus has been
placed on the high prole commercial markets.
This research has argued that an increased understanding of property cycles in an
established housing market can help to address housing affordability by
understanding inevitable market downturns. This is based on the belief that an
PM
28,1
42
increased level of certainty about cycle behaviour in particular suburbs will give
households a higher level of condence when considering whether and when to enter
the market. Further research is required based on other related characteristics
including suburb ranking, level of gentrication and distance to the city centre. This
research also encourages different types of research into property markets and seeks to
provide a different understanding to benet all housing market stakeholders,
especially households in the lower bracket who can least afford an unavoidable cyclical
downturn and the associated negative equity scenario.
References
AHURI (2009), Housing Affordability for Low Income Australian, Australian Housing and Urban
Research Institute, Melbourne, available at: www.ahuri.edu.au/nrv/nrv3/
Ball, M., Lizieri, C. and MacGregor, B.D. (1998), The Economics of Commercial Property Markets,
Routledge, London.
Barras, R. (1983), A simple theoretical model of the ofce development cycle, Environment and
Planning A, Vol. 15, pp. 1381-94.
Barras, R. (1994), Property and the economic cycle: building cycles revisited, Journal of
Property Research, Vol. 11, pp. 183-97.
Barras, R. (2005), A building cycle model for an imperfect world, Journal of Property Research,
Vol. 22, pp. 63-96.
Barras, R. (2009), Building Cycles and Urban Development, Blackwell Publishing, London.
Baum, A. (1991), Property Investment Depreciation and Obsolescence, Routledge, London.
Baum, A. (2001), Evidence of cycles in EU commercial real estate markets: some hypothesis,
in Brown, S. and Liu, C.H. (Eds), A Global Perspective on Real Estate Cycles, Kluwer
Academic Publishers, Boston, MA.
Black, F. (1995), Exploring General Equilibrium, The MIT Press, Cambridge.
Black, A., Fraser, P. and Hoesli, M. (2006), House prices, fundamentals and bubbles, Journal of
Business Finance & Accounting, Vol. 33, pp. 1535-55.
Bothamley, J. (2002), Dictionary of Theories, Visible Ink Press, Canton, MI.
Burns, A.F. and Mitchell, W.C. (1946), Measuring Business Cycles, National Bureau of Economic
Research, New York, NY.
Case, K.E. and Shiller, R.J. (1989), The efciency of the market for single-family homes,
The American Economic Review, Vol. 79, pp. 125-37.
Case, K.E. and Shiller, R.J. (1994), A decade of boom and bust in the prices of single-family
homes: Boston and Los Angeles 1983 to 1993, New England Economic Review, pp. 40-51.
Cox, W. and Pavletich, H. (2008) in Demographia (Ed.), International Housing Affordability
Survey: Rating for Major Urban Markets, Demographia, Belleville, IL.
Cox, W., Pavletich, H. and Angel, S. (2009) in Demographia (Ed.), International Housing
Affordability Survey: Ratings for Metropolitan Markets, Demographia, Belleville, IL.
Darby, S. (2005), Housing Stress in the Private Rental Market: the Case for Increased Funding for
Public Housing, Department of Housing and Works, Ofce of Policy and Planning,
Melbourne.
Dipasquale, D. and Wheaton, W.C. (1994), Housing market dynamics and the future of housing
prices, Journal of Urban Economics, Vol. 35, pp. 1-27.
Dipasquale, D. and Wheaton, W.C. (1996), Urban Economics and Real Estate Markets, Prentice
Hall, Englewood Cliffs, NJ.
Understanding
property cycles
43
Estates Gazette (1995), Property cycles explained, Estates Gazette, November 25, pp. 147-8.
Estates Gazette (1996), Boom and bust property cycles, Estates Gazette, February, pp. 128-9.
Farrelly, K. and Sanderson, B. (2005), Modelling regime shifts in the city of London ofce rental
cycle, Journal of Property Research, Vol. 22, pp. 325-44.
Friedman, M. (1981), Market Mechanisms and Central Economic Planning, American Enterprise
Institute for Public Policy Research, Washington, DC.
Gabriel, S.A. and Nothaft, F.E. (1988), Rental housing markets and the natural vacancy rate,
AREUEA Journal, Vol. 16, pp. 419-29.
Gatzlaff, D.H. and Tirtiroglu, D. (1995), Real estate market efciency: issues and evidence,
Journal of Real Estate Literature, Vol. 3, pp. 157-89.
Glaeser, E.L., Gyourko, J. and Saiz, A. (2008), Housing supply and housing bubbles, Journal of
Urban Economics, Vol. 64, pp. 198-217.
Gordon, C. (2008), Housing stress at record levels in Australia, International Committee of the
Fourth International, available at: www.wsws.org/articles/2008/mar2008/hous-m21.shtml
Grenadier, S.R. (1995), The persistence of real estate cycles, Journal of Real Estate Finance and
Economics, Vol. 10, pp. 95-119.
Hicks, J. (1946), Value and Capital: an Inquiry into Some Fundamental Principles of Economic
Theory, Clarendon Press, Oxford.
Hoyt, H. (1933), One Hundred Years of Land Values in Chicago, Arno Press, New York, NY.
Hoyt, H. (1947), The effect of cyclical uctuations on real estate nance, The Journal of Finance,
Vol. 2, pp. 51-60.
Hui, E. and Lui, T.-Y. (2002), Rational expectations and market fundamentals: evidence from
Hong Kongs boom and bust cycles, Journal of Property Investment and Finance, Vol. 20,
pp. 9-22.
Jud, G.D. (2003), Some Thoughts on Housing Markets Cycles, University of North Carolina,
Greensboro, NC.
Jud, G.D. and Winkler, D.T. (2003), The Q theory of housing investment, Journal of Real Estate
Finance and Economics, Vol. 27, pp. 379-92.
Keogh, G. and DArcy, E. (1999), Property market efciency: an institutional economics
perspective, Urban Studies, Vol. 36, pp. 2401-14.
Key, T., Nanthakumaran, N., Macgregor, B.D. and Zarkesh, F. (1994a), Economic Cycles and
Property Cycles - a Literature Review, Royal Institution of Chartered Surveyors, London.
Key, T., Nanthakumaran, N., Macgregor, B.D. and Zarkesh, F. (1994b), Economic Cycles and
Property Cycles the Availability and Adequacy of Data, Royal Institution of Chartered
Surveyors, London.
Key, T., Zarkesh, F., Macgregor, B.D. and Nanthakumaran, N. (1994c), Understanding the
Property Cycle: Economic Cycles and Property Cycles, Royal Institution of Chartered
Surveyors, London.
Klan, A. (2006), Housing stress: most are suffering, The Australian, Sydney.
Lindblom, C. (2001), The Market System, Yale University Press, New Haven, CT.
Liu, X. (2003), Operation of Chinas Macro-economy and the Business Cycles (1990-2002) Beijing,
Peoples Publishing Press, Beijing.
Macfarlane, J. (1998), An examination of property cycles in the ofce markets of selected
Australian capital cities, paper presented at the 4th Press Conference, Perth.
Malepezzi, S. and Wachter, S.M. (2005), The role of speculation in real estate cycles, Journal of
Real Estate Literature, Vol. 13, pp. 143-64.
PM
28,1
44
Marks, G.N. and Sedgwick, S.T. (2008), Is there a housing crisis? the incidence and persistence of
housing stress, Australian Economic Review, Vol. 41, pp. 215-21.
Meen, D. and Meen, G. (2003), Social behaviour as a basis for modelling the urban housing
market: a review, Urban Studies, Vol. 40, pp. 917-35.
Meese, R. and Wallace, N. (2003), House price dynamics and market fundamentals: the Parisian
housing market, Urban Studies, Vol. 40, pp. 1027-45.
Mission Australia (2008), Housing Affordability, Mission Australia, Sydney, available at: http://
ofcialmissionaustralia.blogspot.com/2008/06/housing-affordability.html
Mitchell, W.C. (1927), Business Cycles: the Problem and its Setting, National Bureau of Economic
Research, New York, NY.
National Shelter (2009), Response to the Treasurers Call for Community Input, National Shelter,
ACT.
North, D. (2005), Understanding the Process of Economic Change, Princeton University Press,
Princeton, NJ and Oxford.
PWC (1999), Real Estate Value Cycles Real Estate Cycle Methodology, PricewaterhouseCoopers,
Global Strategic Real Estate Research Group, Sydney.
Pyhrr, S.A. and Born, W.L. (2006), Theory and practice of real estate cycle analysis, paper
presented at the ARES Annual Meeting, University of Florida, Key West, FL.
Pyhrr, S.A., Born, W.L. and Webb, J.R. (1990), Development of a dynamic investment strategy
under alternative ination cycle scenarios, Journal of Real Estate Research, Vol. 5,
pp. 177-93.
Pyhrr, S.A., Roulac, S.E. and Born, W.L. (1999), Real estate cycles and their strategic
implications for investors and portfolio managers in the global economy, Journal of Real
Estate Research, Vol. 18, pp. 7-68.
Pyhrr, S.A., Born, W.L., Robinson, R.R. and Lucas, S.R. (1996), Real property valuation in a
changing economic and market cycle, The Appraisal Journal, Vol. 64, pp. 14-26.
Pyhrr, S.A., Cooper, J.R., Wofford, L.E., Kapplin, S.D. and Lapides, P.D. (1989), Real Estate
Investment: Strategy, Analysis, Decisions, John Wiley & Sons, New York, NY.
RICS (1999), UK Property Cycle A History from 1921 to 1997, RICS Books, London.
Read, C. (1988), Advertising and natural vacancies in rental housing markets, AREUEA
Journal, Vol. 16, pp. 354-63.
Robinson, J. (2002), The cyclic nature of the real property market: lessons from the Australian
experience, paper presented at the International Real Estate Research Symposium, Kuala
Lumpur.
Robinson, J. (2005), The Melbourne ofce property cycle 1970-2005, paper presented at the
European Real Estate Society (ERES) Annual Conference, University College Dublin,
Dublin.
Rothbard, M.N. (1963), Americas Great Depression, The Ludwig von Mises Institute, Stanford,
Palo Alto, CA.
RREEF (2006), The RREEF property cycle monitor: healthy fundamentals on the horizon,
in Billingsley, A., Christensen, C., Mansour, A., Nadji, H., Naylor, S. and Newbold, S. (Eds),
RREEF Research, Deutsche Bank Group, Frankfurt.
Samuelson, P.A. (1983), Foundations of Economic Analysis, Harvard University Press,
Cambridge, MA.
Samuelson, P.A. and Nordhaus, W. (2001), Economics, McGraw-Hill, New York, NY.
Samuelson, P.A. and Nordhaus, W. (2004), Microeconomics, Irwin McGraw-Hill, Boston, MA.
Understanding
property cycles
45
Schumpeter, J.A. (1939), Business Cycles: A Theoretical, Historical, and Statistical Analysis of the
Capitalist Process, McGraw-Hill, New York, NY.
Scott, P. and Judge, G. (2000), Cycles and steps in British commercial property values, Applied
Economics, Vol. 32 No. 10, 15 August, pp. 1287-97.
Sherman, H.J. (1991), The Business Cycle: Growth and Crisis under Capitalism, Princeton
University Press, Princeton, NJ.
Shiller, R.J. (2005), Irrational Exuberance, Currency Doubleday, New York, NY.
Shiller, R.J. (2008), The Subprime Solution: How Todays Global Financial Crisis Happened, and
What to Do About It, Princeton University Press, Princeton, NJ.
Stoken, D.A. (1993), The Great Cycle: Predicting and Proting from Crowd Behavior,
the Kondratieff Wave, and Long-term Cycles, Probus Publishing, Chicago, IL.
Tse, R.Y.C., Ganesan, S.G. and So, H.M. (1998), Property cycles in Hong Kong: causes and
impacts, Journal of Financial Management of Property and Construction, Vol. 3, pp. 5-25.
Vu, Q.N. (2008), The Effect of Rent Increases on Housing Stress in Australia, National Centre for
Social and Economic Modelling, University of Canberra, Canberra.
Wernecke, M., Rottke, N. and Holzmann, C. (2004), Incorporating the real estate cycle into
management decisions evidence from Germany, Journal of Real Estate Portfolio
Management, Vol. 10, pp. 171-86.
Wheaton, W.C. (1985), Life-cycle theory, ination, and the demand for housing, Journal of
Urban Economics, Vol. 18, pp. 161-79.
Wheaton, W.C. (1987), The cyclic behaviour of the national ofce market, Journal of Real Estate
Economics, Vol. 15, pp. 181-99.
Wheaton, W.C. (1990), Vacancy, search, and prices in a housing market matching model,
Journal of Political Economy, Vol. 98, pp. 1270-92.
Wheaton, W.C. (1999), Real estate cycles: some fundamentals, Real Estate Economics, Vol. 27,
pp. 109-30.
Wheaton, W.C. and Nechayev, G. (2008), The 1998-2005 housing bubble and the current
correction: whats different this time?, Journal of Real Estate Research, Vol. 30, pp. 1-26.
Wheaton, W.C. and Simonton, W.E. (2007), The secular and cyclic behaviour of true
construction costs, Journal of Real Estate Research, Vol. 29, pp. 1-25.
Wheaton, W.C., Torto, R.G. and Evans, P. (1997), The cyclic behaviour of the greater London
ofce market, Journal of Real Estate Finance and Economics, Vol. 15, pp. 77-92.
Wiedmann, M. (2006), Real estate bubbles and monetary policy the US case, EKonomicky
Casopis, Vol. 54, pp. 898-917.
Wu, H. (2009), Emerging Commercial Property Cycle Chinas Property Markets in the Economic
Transition, VDM Verlag, Saarbrucken.
Corresponding author
Richard Reed can be contacted at: richard.reed@deakin.edu.au
PM
28,1
46
To purchase reprints of this article please e-mail: reprints@emeraldinsight.com
Or visit our web site for further details: www.emeraldinsight.com/reprints