Last week on Wednesday we looked at property prices over a 50 year run, to see what we could see see see.
If you haven’t read it… suggest you do. It’s that important.
Here is part 2… and you’ll love what I have discovered… its pure gold!
When we put the price chart onto a log scale (useful for things that grow exponentially) we saw that over a long run, property tends to grow by a remarkably consistent 8 percent (with a bit of movement around that trend line.)
This is exhibit A:
Now if we assume that the trend that been in effect for the past 50 years is going to hold, and prices just come back to trend at a measured pace, this analysis is telling us to look for price growth of around 13 percent a year over the next 3 years or so.
But where is the market going from here? That’s the question. Will we make our way back to trend, or do we have a few more years of drift left in the market?
If we’re looking to time our run, this question is critical.
So to get a feel for that, I started wondering how ‘enduring’ deviations from trend were. How long do the periods last when we’re growing above trend? How long for the periods below?
To do this, I took the year on year growth rates. This is not exactly the same idea as above, but it gets close. By looking at year on year growth rates, we can see if the market is growing faster or slower than our 8 percent trend.
Next slide thank Jane.
This chart plots the annual growth rates. The thick green horizontal line is our 8 percent mark. Above that, we’re growing faster than trend. Below that, slower.
Pretty straight forward hey. I never said I was a rocket surgeon.
You can see there’s a bit of ‘persistence’ in the series. When it gets above trend it tends to stay there. Same as below.
But take a look what happens when I block out those periods with coloured bars….
See the pattern. The periods of persistence are pretty consistent.
- 1983 – 1990: 7 years above trend
- 1990 – 1997: 7 years below trend
- 1997 – 2004: 7 years above trend
- 2004 – ?: 7 years and a few more…
If you’ve been following these blogs, this 7 year figure and 14 year cycles will be very familiar to you. It’s getting a little spooky isn’t it?
The last period is a bit out of kilt with our 7 year itch theory. But there was that period there in 2009/10 where prices jumped up above the trend line – as a souring stock market drove the herd back into property.
If you exclude that period, then we’re just about at the end of a 7 year sub-trend phase.
So what does it mean? Well, based on these trends, you’d have to think the most likely move from here is another 7 years of super-trend growth. Like something around the 13 percent a year mark…
And so in terms of timing our run, it’s nothing but green lights on the runway. The ‘technicals’ are telling us it’s a great time to buy.
But that’s just the mechanical story – and the property market is more than just another mechanical bull.
So you’d want to be sure that the fundamentals were in place before taking a punt on this.
And where are our fundamentals? Well, I’d argue they’re all lined up very neatly in a row. The world is awash with easy money and our interest rates are at 50 year lows. Affordability is primed (especially as rents are rising, making buying more attractive). The economy wide fundamentals are still firm (despite what some will tell you) and housing confidence is (a little slowly) coming back.
So are we going to see 7 years of super-trend growth? I’d say the chances are extremely good.
And it strikes me that now, just before we break through to trend line again, is a perfect time to buy.
Can I make it any clearer than that?