Understanding Economic Cycles (Part I)

Written by Jeff Gunther

On September 15, 2020

If we’re going to invest in real estate, wouldn’t it be great if we could predict the future?

Well we can, sort of. Our economy is made up of remarkably predictable patterns that regularly repeat themselves over time. These patterns, called cycles, can give us clues as to what the future holds.

In this post, you’ll find a quick introduction to the Economic Cycle, and a little trick to figure out what is likely to happen next, and approximately when, in your specific market.

There are 4 stages of an Economic Cycle:

  • Expansion
  • Peak
  • Contraction
  • Trough

Each peak or trough is usually higher than the last, as our economy expands.

The purpose of understanding economic cycles is to learn from them. If we can figure out where we are now, and what’s going to happen next, that might inform our decisions to buy, hold, or sell.

According to the National Bureau of Economic Research, who’ve been tracking economic cycles since the 1850’s, the average US economic cycle is about 5½ years. But that’s an average.

In my early days as a real estate investor, I understood that there was a 5-7 year cycle in real estate markets — from one peak to the next. However, throughout most of  the 1990s, it seemed like there was a long flat period in many parts of the country where real estate values moved very little. I wondered if maybe real estate cycles were a thing of the past. And I wanted to figure out if and when the market might come back to life.

Back in 1997, I spent severeal months looking into cycles, did extensive research and prepared a report called ‘Is Real Estate Really Dead?’. Here’s what I discovered:

Ultimately, people drive residential real estate markets. More specifically: the number of people per household. As it turns out, people are pretty predictable. If you think about it, we generally know what we’re going to do at each age and stage of life. In North America, people move, on average, about every 5 years.

  • 0 – late teens: with parents — in the family home
  • Late teens – early twenties: off to school or entering the workforce — perhaps student accommodation, a small apartment or living with roommates
  • Mid – late 20s: beginning career, more autonomy — young singles or couples may choose a trendy downtown condo
  • Late 20s – mid 30s: maybe starting a family of their one and need space for a family home
  • Late 30’s – 50s: the may choose to invest in a second home or vacation property
  • 60’s & 70’s: may consider downsizing or moving away from the city
  • 80’s beyond: perhaps a decision to age in place, or investigate supportive housing options

This is called the study of Demographics.

Demographics: statistical data relating to the population and particular groups within it

Our population comes from 3 sources:

  1. Fertility Rate
  2. Immigration
  3. Migration

As is the case in most developed countries, the Fertility Rate in North Americas has been in decline for many years and currently stands at 1.5 in Canada, and a little higher at 1.7 in the United States. That means that it each 2 people to produce only 1½ new people.

The second population source is Immigration. Immigration is people moving to your country, whereas emigration is people moving from your country. So we really need to talk about net immigration. Whenever a fertility rate is less than 2, a country needs a positive immigration rate to maintain or increase its population.

The third way a population increases (regionally) is through Migration. These are people moving across your country. And again, we need to talk about net migration, because people from your town as well.

Usually, people immigrate or migrate looking for a better life, and this almost always means jobs, which enables them to buy or rent homes. Where there are lots of people, there is a need for goods and services. The need for goods and services drives jobs. And jobs attract more people.

Wouldn’t it be amazing if you could know, in advance, how many people will be in your part of the world, and when? Well you can!

There’s great research available that can give you clues as to what to expect. Have a look at this Population Pyramid.

  • Men are on left; women on right
  • Not many people early on
  • Watch for upcoming increases or decreases in population, signalling where we are in the cycle and suggests goods, services, or accommodation that will be in greatest demand
  • 1914 – 1918: WW1
  • 1937: smallest cohort; many people to serve following
  • 1939 – 1945 WW2
  • 1961: largest cohort; fewer people to serve following
  • 2017 pink = projections

Remember, real estate markets are local. A population pyramid for all of the United States or all of Canada won’t do you much good. You’ll need to find data for your specific area.

Here’s a link to everything referenced in this post and many more helpful resources: www.myrealmnetwork.com/crash.

So, how did my research turn out? Well, remarkably accurate. I had listed several opportunities to watch for. I only wish I’d taken advantage of more of them!

I’m sharing this information with you, NOW, so you can find your own opportunities. Here’s a full video presentation of this post.

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