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Homer Hoyt and Wesley Mitchel are credited as the champions who brought first the concept of real estate cycles as being fundamental to the early land economics in the late 1920s and 1930s (Phyrr et al 1999). But despite the importance of the concept of these cycles in business and land economics, real estate cycles have been largely ignored or discounted by real estate academics and practitioners until in recent years where they have begun to gain popularity.
Wheaton (1999) defined real estate cycles 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.' Burns and Mitchell (1946) as cited by RICS (1994) stated that; ''Property Cycles are recurrent but irregular fluctuations in the rate of all property total return, which are also apparent in many other indicators of property activity, but with varying leads and lags against the all property cycle.'' Property cycles are recurrent and yet irregular fluctuations in the performance measured against the fluctuations of the real total returns (Jadeviciu et al 2016). Baum (2000), went on to simplify the definition of property cycles saying that, property cycles refers to the fluctuations in property demand, supply, prices and returns measured against their long term trends and or averages over time.
Dipasquale and Wheaton (1996) and Ball et al (1998) summed up the concept of property cycles and outlined the key characteristics as recurring fluctuations, non-periodic, identical 'patterns' of co-movement and their strong link to the general economy as the relevant market indicators that characterise real estate cycles. Cyclical fluctuations within the real economic activities are typically driven by the business cycle, and the business cycle could be measured in terms of gross domestic product (De Wet and Botha, 2019). The general business cycle is perceived as the most important influence of real estate cycles with rent and price fluctuations as the most important cycle variables (Graaskamp, 1981). Building lags against business cycles, geographical and economic condition-dependent, structural settings and behavioural speculations have a strong influence on the property cycles.
Pyhrr et al 1999 categorised property cycles into micro, macro and managerial angles and according to them, property cycles are as such linked to investment, politico-economic decision making critical to different role players in the property investment markets. Individuals and entities evaluate and make decisions against the general market movement. From the macroeconomic perspective, real estate cycles are regarded as business cycles focusing on the overall construction activities and sector unemployment rates to determine the correlation between cyclical behaviour of the real estate and other markets (Rottke and Wernecke, 2002).
Wernecke et al (2015), cited that property cycles can further be broken down into two different categories; the physical cycle of demand and supply which determines the vacancy rates and drive rentals and the financial cycle where the capital flows affect the process giving rises to the economic booms and busts. Different scholars over the past the years have failed on the most congruent definition of the property cycle and the cyclical nature of the property cycles (Baum, 2001). Indeed, previous attempts to define cyclical behaviour in property markets from different perspectives have created confusion and controversy (Reed and Wu, 2010).
Although there is no clear link between the boom-bust cycle theory, there is a general notion that property markets behave cyclically in the long run mainly due to building lags when compared to changes in demand for space which are mainly driven by fluctuations in business activities (Reed and Wu, 2010). As a result, these boom-bust cycles theories are not theories on their right (Reed and Wu, 2010) because the events that trigger major cycles in property markets are explained often by the irrational human or crowded behaviour (Skoken, 1993; Shiller, 2005). The expansion and decline in the property development are as a result of the subset of the classical business cycle fuelled by among other things government's economic policies, changes in fiscal policies and the world oil and gas prices (Whitehead, 1987). These factors are seen as the contributory but they do not offer sufficient explanation for the boom-bust cycles.
Changes in general economic activities affect the household and firms which in turn drives the effective demand for space forcing property developers to supply new space. But the lengthy process in space development creates delays and mismatch compared to the changes in the market demand; the lag between building supply and demand is one of the most popular reasons for property cycles (Barras, 2005). These fluctuations are linked to the general economy and submarkets (Barras, 1983, 2009). The real estate cycles are directly correlated to the business cycles. Business cycles followed by large investment volumes, the opacity of the market, life-span of buildings and the irrationality of the market participants also results in property cycles. Other causes of real estate cycles are the government and its influence through taxation and subsidization and the lack of forecasting ability (Wernecke et al, 2015).
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