The relationship between general economic cycle and the real estate cycle

Abstract

The economic cycle is the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession). Factors such as gross domestic product (GDP), interest rates, levels of employment and consumer spending can help to determine the current stage of the economic cycle. The recognition of the cycle’s importance together with an increasing industry focus on real estate has caused investors and portfolio managers to place increased emphasis on the strategic and decision making implications of real estate cycle theory and analysis. Real estate business activity shows a very high correlation to the general economic events and cycles. Cycles are a major determinant of success or failure because of their pervasive and dynamic impacts on real estate returns, risks and investment value over time – impacts that should not be ignored or over-simplified. The real estate cycle is very similar to the general economic cycle, however it usually follows with about a year delay. The adage „timing is everything” is especially applicable to real estate development.