Real estate speculation drives this cycle of boom and bust. Economic growth leads to higher real estate prices as demand for property (from expanding businesses and flush households) grows. This increase in property prices is ultimately driven by land values: a house costs much the same to build, in terms of labour and materials; regardless of where you build it it’s the location that makes the difference to the value.
Today’s property investors understand this as ‘locational value’, but the technical term is ‘economic rent’. Economist David Ricardo first articulated this idea in the early 19th century.
Phil Anderson discovered that the cyclical behaviour of the cycle will repeat. But once you discover the fundamental law of economics —economist David Ricardo’s Theory of Rent — you’ll see that a repeat is all but inevitable. Why? Because the underlying structure of the economy has not changed, despite the endless fiddling and additions in regulations and laws.
The desire to capture this ‘economic rent’ induces ever-more construction activity and speculation on land, fuelled by bank lending. As the good times continue, more and more investments are made based on hopes of future or potential capital growth, rather than a decent rental yield.
A property crash ensues as developers and banks over-reach themselves. Falling land prices then damage the banks, which lent too much money against land during the boom times — with their balance sheets in tatters, lending dries up. As credit is sucked out of the economy, and building activity collapses, recession or even depression is the result. But while it takes several years for the bad debts to be cleared, economies eventually recover. Property cycle will always repeat.
Generally the expansion lasts for around 14 years, and the crash and recovery, four years. The cycle is very simple — so much so, that you might wonder why it’s not more widely recognized. But because the role of land in an economy has been virtually unknown in economics textbooks, hence most economists cannot see it.
Is Malaysia property cycle still within the 14 years expansion period? If so how many more years to go before the cycle turn down? Where are we now in the 18-year property cycle?
To find out the answer and more about the 18-year property cycle aka Property Millionaires’ Secret Clock and to find out what is the time in Malaysia in the property cycle click here.