Originally published May 2022.
Everything follows a cycle, says this writer.
Cycles are vital in nature. The carbon cycle, the nitrogen cycle, the hydrological cycle, planetary orbits, the phases of the moon and ocean tides – all are cyclical and linked to the process of sustainable renewal. These natural phenomena, when operating in balance, generally follow regular patterns and are highly repetitive. The business world is also subject to cycles, with economic output, capital flows and investment fluctuating over time. Unlike nature, business cycles do not display the same regularity, making them much harder to predict.
The real estate industry is held up as a textbook example of a highly cyclical business. When comparing long-run UK real GDP to long-run UK real property returns, the link between economic and property cycles is self-evident.
In theory, property should lag the economy, reflecting that demand is derived from the shelter it provides and the economic activities it facilitates. However, in practice, property can actually lead the economy, such as during the GFC. At other times, it can be more concurrent, with turning points in the business cycle. That explains why the statistical correlation is a little lower (+0.5) than the chart suggests – it simply reflects that the relationship between property and the economy is not static.
