Cycles, by definition, tend to repeat. Although no two cycles are identical, there are generally enough similarities between them to provide some guidance on what is likely to happen next. For the purposes of tracking the real estate market, probably the most important cycle is the business or economic cycle, which is defined as the changes in levels of GDP and refers to the period of expansions and contractions around its long-term growth trend. Not all economists agree that cycles exist but it appears that governments do, and they see their role as being counter-cyclical, taming too-rapid expansion (which might trigger higher inflation) and stimulating growth to limit downturns. The main tool utilised in controlling cycles, albeit exercised more by central banks nowadays rather than governments, is interest rates. In the last 20 years, central banks have aggressively intervened to stimulate growth rather than control inflation, which is why interest rates have ended up close to zero. Having more or less run out if capacity to reduce them much further, central banks have introduced the previously largely untested ‘quantitative easing’, intended to reduce yield rates in the bond markets and encourage/force investors into riskier assets. That looks more like a secular shift to us, causing a repricing of the other asset classes to match the changes in bond yields. The very rough ‘rule of thumb’ as to where interest rates should be is at a rate equilaentnominal GDP - the real rate of GDP plus (GDP) inflation. This would be around 4% in the growth phase of the cycle but close to 0% in a recession. In other words, interest rates are pitched at a level that would be required ina recession. In addition to that, the quantitative easing programme has reduced the effective interest rates even lower. Undoubtedly, these central bank interventions has stimulated most asset class prices towards record highs, although arguably none more s than real estate. The problem for the asset class will come when these extreme positions need to be unwound. Ideally, this should be done gradually and in lock step with a cyclical recovery to growth, So far, since 2008/9, adequate growth has proved difficult to achieve, with signs limited productivity gains (despite the continuing introduction of ‘disruptive’ technologies) and a lack of business development. There are now growing concerns that inflation may be starting to pick up in the US, partly because of a government (not central bank) stimulus programme benefiting lower income families which, it is believed could lead to short-term boom in consumption. The risk is that the Federal Reserve will be obliged to raise interest rates and that, despite the quantitative easing programme, bond yield will rise as a result; there is already some small rises in the the latter. If the Federal Reserve raises interest rates, that may bring pressure to bear on other countries to follow suit. All of this increases the risks for equities, real estate and other risky asset classes. For real estate, which is very dependent on the cost of debt, the coast of capital would increase, with the cashflow discount rate also increasing and the common measure of the yield gap would reduce. All of this would in total, probably have a greater impact on real estate than equities. The relatively easy ride that real estate has enjoyed over the last decade may now be coming to an end. Investors need to review their tactics and strategies to ensure that they are prepared for the increase risks.