With prices of existing properties well above their construction costs, builders can quickly make a lot of money. Build at $100,000; sell at $130,000. Great! $30,000 profit. Naturally, too many builders rush in to grab a pile of profits. Because of these optimistic builder expectations, the supply of new homes shoots up. What was recently a shortage becomes a surplus. Buyers who bought near the top of the cycle face disappointment (or worse) as rent levels and property prices temporarily stagnate or slide back to lower levels.
High builder profit margins may lead to overbuilding.
Recovery Over time, banks pull back their mortgage lending. Builders sharply cut their new developments. Rental vacancies begin to tighten; the number of unsold homes begins to fall. Potential renters and home-buyers again outnumber the supply of available properties. Property prices and rents stabilize and then edge up. Eventually, as shortages again loom on the horizon, vacancies fall further. Prices take off on another rapid run-up. The construction cycle turns another revolution. Prices set new record highs.
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