Thanks![suave2]
F.[cowboy2]

What? >100 views and nobody has a comment? After hearing “real estate cycles are typically seven to ten years”, “we’ve reached the low point in the current cycle”, “it may look like a bad investment NOW, but time heals all wounds – in ten years you’ll be quids ahead” etc so frequently of late, surely somebody is prepared to look for a hole in my simple analysis?
To reiterate, my thesis:

– House price cycles are 16 to 17 years long.
– The cyclical low is always below a rising trend (‘fair value’).
– The ‘fair value’ trend of the current cycle for Melbourne is at current nominal prices in 2012 (around 368k / 300k x 2005 $).
– 2012 should be the next cyclical low, so selling prices should be below the ‘fair value’ trend at that time.

If I could post graphs & tables, I could make my point more clearly, but any comment is appreciated.

F.[cowboy2]

…That’s… much better! 65% LVR is just about conservative![guilty]

F.[cowboy2]

Kerwyn, if somebody in the USSR had been quietly trading some of their paper money for gold during the 80s, secreting it under the pear tree in their back-yard, would they have been better off or worse off than average by the mid 90s?

F.[cowboy2]

Sorry to disagree here Michael, but here are some facts. In inflation adjusted 2005 Australian dollars, the peak of the last/current cycle during 2004 was much further from trend than 1989, and the reason the slump has appeared much less severe is because we are only just at the beginning of the correction. House prices around the country are still overvalued and at some point will return to trend (and beyond if history is any guide (which is the whole point of cycle theory…)!).

Some numbers:

Melbourne median house price in 2005 Dollars
Peak 1974 – $270,500 – trend $202k – 34% over-valued
Trough 1983 – $186,500 – trend $237k – 22% under-valued
Peak 1989 – $298,200 – trend $257k – 16% over-valued
Trough 1996 – $228,050 – trend $290k – 21% under-valued
Peak 2004 – $394,250 – trend $307k – 28% over-valued

74 – 83 peak to trough – 7 years – 31% fall
83 – 89 trough to peak – 6 years – 61% rise
89 – 96 peak to trough – 7 years – 24% fall
96 – 04 trough to peak – 8 years – 73% rise
04 – 12 peak to trough – 8 years – 30% fall* ???

74 – 89 peak to peak – 15 years – 10% increase in actual wealth
83 – 96 trough to trough – 16 years – 22% increase in actual wealth
89 – 04 peak to peak – 15 years – 32% increase in actual wealth
96 – 12 trough to trough – 16 years – 30% increase in actual wealth* ???

*This scenario sees the median Melbourne house price at a touch under 300 thousand 2005 dollars seven years in the future. It fits well with previous cycles and sees a similar relationship to the long term mean inflation adjusted value.

So a couple of things should now be clear – firstly that cycles are 15 to 16 years long, secondly that they have been increasing in magnitude over the last 30 years, and finally that while there is a rising trend, it is below 2% rather than the 7-10% that most real estate spruikers use as a guide (even less once size / quality improvement adjustments are made). This indicates that the current bear market / correction / negative sentiment is likely to persist for another 6 to 7 years, and that the average house purchased now will be worth LESS in real terms for the next 14 years at least. If the next cycle is of a lesser magnitude than the current one, that house may be worth less in real terms than its purchase price for the next 30 years.

Regards, F. [cowboy2]

… as in the real estate market.
I’ve been pretty consistantly making between 20 – 70% pa returns on my share investments over the last 2 years.
Should I:
a) maximise my leverage into the sharemarket using my current strategies?
b) realise that the last 2 years have been pretty exceptional for shares and plan in accordance, ie using hedging strategies for higher risk investments, taking profits on stocks that have performed well and appear fundamentally over-valued?

Now consider your response, but replace share & sharemarket with house & real estate.

Cheers, F.[cowboy2]

Hi carl_vic,

PM me your email addy and I’ll try to find some time to send you my excel data for Melbourne… in between signing you up for herbal viagra & cialis spam…[biggrin]

Just kidding. I have the data.

F.[cowboy2]

…Well, yes. The problem is that the current situation of wage inflation growing faster than GDP is not sustainable for long – at least not with falling or static unemployment levels.

Out of interest, has anybody here had a 6.5% wage rise this year? Mine is only up around 5%…[jealous]

F.[cowboy2]

… It would seem that Perth’s 10-year index has caught up with the other capitals – all are between 240 to 250% of 1995 median price. Rental yield is higher than Sydney & Melbourne. Some detail, a bit of analysis and some graphs are available from the RBA’s statement of monetary policy pages 35-40. This will probably be the best source of accurate real estate data going forward.

Cheers, F.