I never thought I'd see the day. Satan's wearing ugg boots this morning, because I've found an economist I actually agree with.
The other day, in one of my posts I noted that 4-5 year downturns in the property market, like the one we've just seen, are not that unusual in the scheme of things. If you look back over the past 20 or 30 years, they come around fairly often.
As such, there's no need to panic and start piling into the lifeboats just yet.
But as it turns out this pattern of 4 or 5 year pauses has been going on…well, possibly forever.
I've been looking into the work of economist Phillip J Anderson. He's had his hard-hat on and has been digging around in 200 years worth of American and Australian property data.
What he's dug up is the equivalent of an alien space craft. It's creating a helluva buzz (and there are spooks in suits and sunglasses all over the place, trying to shut it down).
With the data he's got, he reckons that property's been moving in 18-year cycles for as long as he's got data for – back to 1800 in the case of the U.S.
And it always plays out the same way. 14 years up, 4 years side ways. 14 years up. 4 years sideways.
He reckons you can set your watch by it.
Take a look at this chart here. It looks at the volume of American public land sales between 1800 and 1923 (there's not much reliable price data that goes back that far, so volumes will have to do…)
What you can see playing out, again and again, is a speculative boom and bust. The markets gets red hot, then it collapses. Round and round it goes.
And how long between the peaks in sales volumes in the chart above?
18 years. Almost on the dot.
And he reckons that what we've seen over the past 4 years, is just the regular sideways phase in his model. Nothing out of the ordinary.
… So I started thinking, I have been telling you that this period right now reminded me of the early and mid 90's period… If his theory is correct, let's see how it lines up even more during that period of time.
Here we go.
1987. We had a massive stock market crash.
1988-90. We had a massive real estate bull run, culminating with crazy interest rates of up to 18%
1990-91. Real estate prices crash and the country goes into a recession.
1991-96. Markets go no-where, interest rates come crashing down from the insane highs of 18% to 6%
1996- 2000. Real estate prices recover and strong appreciation after 5 years of not much happening.
The stock market surges as well.
2000. Tech wreck… stocks take a break, but real estate continues to grow.
2004. Another top for real estate… a bit of a pause and then continue to grow in prices…and then…
2008. The GFC hits and everyone is asking WTF is going on…Markets crash globally.
2008- 2009. The end of stock market highs and real estate stops dead in its tracks.
Okay, you with me so far…?
Let's do the numbers, based on Phil's theory.
1991-95. That would make it 4 years of down turn and recovery. TICK!
1995-2008/9. Prices move from lows to significant highs…13/14 years. TICK!
Mmmmmm isn't that interesting… the 18 year cycle plays out again…scary!
* Real life example: I bought 2 bedroom single front in Brunswick Melbourne in 1997 for, $104,000 sold it in 2004 ( don't ask, it was against my will ) for $349,000. Probably worth $550,000 today…
How's that for appreciation $104,000 to $550,000 in 14 years…
And we are at the starting point once again on the verge of a significant BOOM !
So there you have it. I agree with an economist. Mind you, he's not your usual economist. He wears his hair a bit long, dresses casual, and is a bit of a renegade in the industry (you can see why I like the guy, can't you?)
It got me wondering, maybe there are similar cycles playing out in the share market. Turns out there are.
Have a look at this chart here.
What this shows is that there are regular 16-18 year bull/bear cycles in the market. Things go up for 16-18 years, then they go sideways for 16-18 years.
A bull and a bear chasing each other round and round on a merry-go-round. Just like clockwork.
There's a couple of interesting points to note about this, I reckon.
The first is that the last bear run kicked off with the bust of the dot-com bubble around the turn of the millennium. That means, we're probably not going to see a solid pick up in shares til about 2016.
The stock market has been trying, but it's having trouble busting out its holding pattern.
That's also been my feeling for while. Stocks are laying the ground for another big run, but we're not quite there yet.
The other interesting thing in this, is the “phase synchronisation” that's happened, with the downturn in the 18-year property cycle coinciding with the middle of the bear run in stocks.
That would explain why we just had such a doozy of a down-turn. And why that doozy created the impression of total system collapse. Two major markets moving into down-phase together…
The curious and sceptical side of you might be wondering why these markets move in these particular 18 and 32-year cycles. What's the significance of these numbers?
Why is it so?
It's a good question. Phillip J Anderson doesn't know the answer. And that makes his pointy-headed economist colleagues a bit sceptical.
If you can't explain it, can you rely on it?
But the world is full of mystery. And the human world is full of patterns.
It's just one of the quirks that emerge as humans perform the monumental miracle of making the world tick over. We construct standardised time, trading sessions, a regular work week. We gear into quarterly reporting seasons, financial and calendar years, create repayment schedules on our mortgages over 20 year time frames.
Little patterns create bigger patterns.
A 1-year becomes a 5-year term. A population of mortgages organizes itself into 18-year cycles.
Maybe so. It's no so hard to believe.
But you know me, I like to get behind the data and know what's going on.
And what I like about Anderson's model is the driver of the dynamic – credit. The key thing that seems to drive the 4-year downturns is a credit crunch. Time and time again.
A credit crunch just like the one we've just seen.
And if you look at the finance data, a credit crunch just like the one we're steadily on the way out of (check out my article from a few weeks ago if you don't believe me.)
And so there's everything to suggest that we are well on the way into another 14-year boom in property. And once the stock market swings into a bull phase, from 2016 on, a boom in equities as well.
And when the two combine, each amplifies the other, into some sort of mega-boom of awesome.
I've used the line before, but the stars are aligning, and now history is on our side.
It's a great time to be alive.