When taking a market position, although I have found Steve’s 5 investor tips helpful, such as monitoring the Interest rate trends, Auction clearance rates, media sentiment, building approvals and individuals’ opinions regarding the matter, I can’t help but feel this is far too arbitrary. To me, it seems that the property market seems to only ever take a collective upswing when an incentive is thrown in from the government, scarcity and demand coincide (often more rarely than perceived) or like Warren Buffet would say: *when a short-term bad news/good news anomaly occurs* ie. the stock market crashes on some trivial news story…etc. For instance if you look at the REIA for the last 25 yrs of median house prices on all capital cities…almost every notable market shift was preceded by the 1987 stock crash, the sudden downswing of draconian interest rates or the FHOG. otherwise, median city cap growth seemed to stagnate or grow steadily, but slowly. But more importantly, I have wondered why this boom was the greatest of all. And to me it all seems to come back to low-interest rate induced bank/financier lending competetiveness, leading to more willing lenders, more willing borrowers, more speculation, more overusage of equity and awareness of the power of leveraging equity in one’s home, and the abundance of Real Estate investment seminars that hit Australian shores since 1999 onwards topped off with some juicy media reporting on property. The debt will finally catch up with the majority who have underserviced their massive debt by buying a stockpile of so called blue chip, mark-up retail properties for tax savings. The crash is looming and will rock the market like we have never seen before in our lives (simply as a correction to speculative prices firing way above inherent building and land value, and debt build-up), and in my view, this is the real boom time. PS I disagree LVRs will be lowered, and more cash needed as Steve suggests…I think the competition for home loan pre-eminence is overwhelming! any thoughts on this?
You are correct that Australia’s proeprty markets move in cycles. While these occur every 7 to 10 years, they don’t occur because a period of time passes, but because a set of economic circumstances occur.
These are macroeconomic – on the large scale in Australia and microeconomic – effecting local markets – things such as supply and demand.
Steve’s 5 points are monitoring a number of the many factors that collectively effect the market.
In my current newsletter (subscribe for free at http://www.metropole.com.au)I discuss the current state of the various macroeconomic factors in detail.
The market tends to move from its slump into its upswing stage related to supply and demand. You are correct in saying that the government can affect this with grants etc. but there are many other factors.
With regards to the last boom being the “greatest of all” – this is not correct. The upswing may have lasted a long time, but if you measure the magnitude of increase in property prices, the boom of the late 80’s beats the last one “hands down.”
That is why the late 80’s boom was followed by a much more severe downturn than the last boom was.
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auThanks Mike!
your clarity has helped me to understand my frustrations a little better with this perpetual question
regards, yidn
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-valued74 – 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]
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]
Originally posted by foundation: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]
Interesting post, I haven’t replied because I’ve been interstate – enjoying the Brisbane sun – I’m up here to present at the Reno KIngs workshop.
I would disagree on the 16-17 year cycle. There is no doubt that these are the major peaks, I probably have the same stats as you, but there were intermediary, but smaller property peaks in 1982 and 1985.
I guess it depends what you call a peak .
I do agree that it is not a period of time that causes these peaks, but they are related to economic factors and supply and demand.
I would be really interested to see your graphs and data – I am always willing to learn. Could you email them to me – [email protected]
What is you basis for determing that proeprty prices are overvalued?
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auOriginally posted by foundation:What? >100 views and nobody has a comment?
Armmm. My only comment is I’m not going to argue those statistics!
I’d love to have those graphs, etc though. I’m sure everyone would! What is your position in the market at the moment F? Are you buying/selling/staying the hell away?
Munjy
Munjy,
If you send your email address via PM, I’ll forward you my xls. It is rather crude, but will hopefully become more useful over time.Are you buying/selling/staying the hell away?None of the above! I’m an investor, not simply a property investor, and at the moment I’m finding great opportunities elsewhere. I’m monitoring the real estate market as much for its impact on consumer spending as anything. That said, I’m also watching a large farmlet with subdivision potential near home, but the numbers don’t yet make the risk attractive. I don’t aspire to be a landlord on a massive scale, but will use real estate to build wealth if and when it makes sense to.
Cheers, F.[cowboy2]
The analysis and stats that are being presented in this thread are great. I do have a few questions:
1. How does one apply this data/analysis to a strategy for property investment in the current environment?
2. Where does this data come from? Is it freely available on the internet or is it something that only “insiders” have access to?
Foundation – please can I have a copy of the graphs also?
Thanks
t1PS: Mr Michael Yardney – I have registered for the Metropole newsletter twice in the last couple of weeks and have not received anything… is it a monthly distribution?
Yes it comes out monthly but you should get your first email within minutes of subscribing.
Thanks for letting me know about your probelms as we get 10 -15 subscriptions a day and it all happens automatically. Pleasesend me you details to [email protected] and I will check what is going onMichael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auWow Foundation,
That is excelent about the best stuff I have read for a long time, I cant belive it but know that what you are saying is true.
Just one thing I would like to add, the only reason we have not had a huge crash like 1990 all ready is a cobination of low interest rates and consumers living of equity that they have in there over priced homes . How ever this will catch up over the next couple of years.
In 1990 people didnt live of equity but it seems to be pretty popular at the moment.Cheers Rick
Monopoly, my favourite game
Ahh Foundation
Does it really matter if the cycles are 16 years or 2 years?
If you pick up a good deal and on sell it for a profit; which by the way can happen whether the cycle is up or down? Do all the stats and graphs really make one ounce of difference?
Kerwyn>100 views and nobody has a comment?OK, F, I’ll have a crack at it.
surely somebody is prepared to look for a hole in my simple analysis?Yep – the glaring hole is very very hard to spot when you are way up there floating in the exosphere of official ABS stats, Govt and REI post reviews – which have all been bell curved and normalised to death.
I’ve said it before in my posts, you cannot buy median property in ‘the market’….it doesn’t exist. What you can buy is individual titles and this is where the hole in the stats argument grows very large indeed. Trouble is, you can only see the gaping wound when you have your nose to the ground sniffing out individual prop. deals that don’t fit the bell curve.
There are many many great deals out there still, where both cap gain and massive increases in yield can be extracted…which the ‘median average smo’ investor flying up in the exosphere of official waffle talk and expert opinion simply drives by and dismisses.
The trouble with talking about ‘the market…and where “it” is in it’s cycle’ is that it’s so huge and diverse that anyone who tries to discuss it flippantly in a paragraph or two simply shows their ignorance.
When you say the ‘market’ do you mean ;
1. Vacant land in Perth metro
2. Units in inner Sydney
3. Container yards in Hobart (??)
4. 4×2 brick houses in Brissy
5. Office building in Rundle St mall
6. Car yard in Geelong
7. Boat pen in Darwin
8. Factory unit in Canberra
9. Broadacre in Hay
10. Pastoral lease in KimberleySeriously, anyone that tries to capture all of the above in a single sweeping up in the stratosphere type comment is simply talking out of their…hat….but far more relevant than just talking about it and studying it….who actually makes any money from this trend watching and posticulating ?? Other than the statistician’s of course.
Data / data / data / it’s the new mantra of the info age….trouble is I’ve met many wise old grumpy sages who cannot drive a computer and never have access to any of this data and theories, and yet make oddles of dosh from simply concentrating on the local deals and knowing exactly what is on the ground at any one time.
Officially I’m wrong of course and anyone with statistics can ‘prove me wrong’…but then where does that get you ??
Jan Somers reproduced in one of her earlier books a statement by one of the guru’s of property investors who was making millions before Steve was born. He spelt out all of the poppycock that the experts kept on carrying on about. English imports, wool prices, oil shocks in the 70’s, feminism, recessions, floating the dollar, etc etc etc. All very good reasons for stalling investments….he ignored the lot and went on to make gazillions.
Graphs and stats begone. Hunt the individual title and see what you dig up.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
I honestly believe an RE deal is made and not necessarily location dependent as Steve advocates. However, at the same time, I think it is wise to try to tackle the market stats and examine them as pointers at least to the extent of analyzing their merit as guides to the prevailing property market sentiment of the past and the present; and then make an educated speculation of what the new flavour of the month will be. Why ignore figures when they are there as useful pointers?….but by the same token….why let stats obstruct your willingness to take action and create your own wealth through RE?
Yidn
Flip…
However,Flop…
at the same time,Flip…
….but by the same token….Flop…
Geez Yidn, is it truly possible to sit on three or four fences all at once ??
it’s called synergy and compounding interest dazzling
the recipe of great wealth
Hey Dazzling,
Brilliant post!
I’m a novice in the IP game, but that sure made a lot of sense to me.
I’m sure there are always going to be stats out there to suggest you should either NOT invest now or INVEST now.
Cheers,
Batts
Dazzling – the ‘market’ I have been referring to is the one consisting mostly of 3 & 4 bedroom suburban detached houses. You know the ones – 95+% of real estate investors have one or two…[biggrin]
Anyhoo – if those who now have the spreadsheet fill down the relevant columns to 2020, the forecast is for Melbourne’s median house price (detached 3 or 4 bedroom suburban standard residential lease etc[biggrin]) to be around $550k in 2020 dollars. While this is well short of the 1.5 million that the ‘double every 7 years’ theory predicts, it indicates that gearing yourself to the eyeballs NOW to purchase the afore mentioned median house at 3.5% yields could still be a great wealth creation strategy over the next 15 years.
Of course, the cycle theory may prove wrong.Cheers, F.[cowboy2]
Disclaimer: The above is pure conjectural bullxxxx and should not be taken as investment advice. If I was to give specific financial advice for your situation, I’d have to say “put it all on black”. What? I was wrong? So sue me.
I’m going to sit on the fence on this one.
I feel like both Dazz and F have valid points. One is looking at the trends, and the other looking at individual positions within the trend. Both are of value. Especially if the market has alot of imperfections, like the property market.
Munjy
Folks,
Here is another way to look at the current state of play. The major factor is that we have had a good run over the last few years. Hopefully you made some capital gain too. The underlying factors that push the market upwards are :
1. Supply and demand
2. affordability
3. confidence
There are other factor that help or hinder the market gaining in value, but not to the extent that they overshadow these 3 factors.To explain, 1. If you live in a growing area the likely hood of above average gains (especially if housing has been in a sustained slump, built up demand). If you live in a dying economic rust belt town, prices will fall.
2. Affordability. If you look at the lending criteria for most banks it is 30% of income. prices go to high, you can’t afford it. prices stay stagnant for 10 years, they become cheap. As an example I bought an average house in Brisbane in 1987 for $60k I was earning about $29K pa at that time (about 2.1 times earnings). 12-18 months later I sold for $125k, wage still the same (4.3 times) the prices kept going for a while to about 5.6 times earnings. The market settled down for about 10 years in QLD. In 1998 I bought a house for $139k only a few KM from my first house. My wage was now about $65k pa which can back to the 2.1 times earnings. Realising this I bought 2 investment houses and held then for 3 years and waited until they reached approx 4.5 times. I sold that house for $297k. It is now worth about $390k Maybe I sold too soon, but I made my profit on that one bought vanother house for $179k and sold for $276k. My theory is that 4.1 times your average earning in an average market is the type of house you would aspire to live in, an can afford (remember 30%wages bank criteria) when it is above or below the 4.1 is in MY judgement a time to buy or sell. I think we have had our run and factor number
3. Confidence has taken some house prices to 7.2 times earnings. When confidence leaves the market, which it obviously is (otherwise we wouldn’t be having this conversation) things slow down, money moves to greener pastures etc.
Currently factor 2 is being partly helped by low interest rates, factor 3 is being sustained by reasonable job prospects for most people.
This is why in MY opinion we have had a long….. boom and a softish landing. Please keep in mind this how I view things, I know that this will get a reaction,I don’t claim to be an expert. This is how I made money in regards capital gain, I am just sharing. Now you can tear my theory apart.
JTW
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