I’ve got a bunch of charts for you today that show that the housing ‘cycle’ is running hot.
But what exactly do I mean by that?
When I’m thinking about the housing market I find it useful to separate the drivers of value into two categories.
The first are the structural drivers. These are changes to the fundamental structure of the market – the kind of participants in the market, fundamental changes in their tastes or preferences, changes to taxation or zoning etc.
I spend a lot of time talking about these kinds of factors in these blogs. Partly it’s because I find this stuff interesting, but mostly it’s because, in recent years, it’s these structural features that have dominated the housing story.
Things like the tidal wave of money being generated by quantitative easing, the surge in super-funds, the rush of Chinese buyers and so on.
But over the top of these structural features lie the ‘cyclical dynamics’.
It’s important to remember that property, despite all the fuss and attention it receives, is a market like any other. And all markets move in cycles.
I think it’s just what happens when you have a large number of people trying to manage a large volume of information, with lags built into the system. You create a constant process of over-shoot and correction.
And so the market booms for a while, then it’s soft for a while, then it booms for a while…
… and round and round it goes.
And so if you go looking for it, you can see these cyclical patterns in the housing data. Let’s have a look at Sydney house prices for example. They’re a classic.
Take this graph here. This is established house prices from the ABS. The index is the blue line. I’ve added year on year changes at the bottom in orange bars.
Now, what should jump out at you is the acceleration we’ve seen in recent times. And note that this data is only up to the September quarter. All reports suggest October and November were even bigger.
But the other thing that should jump out at you is that the pace of the increase (the steepness of the line) is not unusual. We had similar ramps up in 2009 and 2002. This is the cycle.
Now look at the year on year changes. It really highlights the cyclical nature of prices. Just to be clear, I’ve overlayed my own read on the cycle here:
We can see that the Sydney cycle bottomed out around May 2012. And this is how the cycle flows – correction, bottom, recovery, boom.
Right now, on my read, we’re still in early days of the recovery, and the best days of the boom are still before us. The cycle is telling us that 2014 should be a great year.
I mean, house prices in Sydney are very quickly moving towards 15%!
If we scan around the other housing data we can see it’s all telling a consistent story.
The earliest read we got on the coming boom came from the auction clearance rate data, which have been in boom territory since the middle of the year.
We’ve all heard about how Sydney is going bananas, but so is Melbourne. Even Adelaide, which historically has never been a great auction market, is enjoying some seriously impressive results.
One of my favourite charts of the year came from ANZ, looking at the predictive power of the clearance rate data:
What they show is that the clearance rate data leads house prices by about 6 months. That makes sense. It takes a little while to clear through any slack. And so if we fast forward six months, what the clearance rate data is telling us is that we should be looking for national house price growth of plus 13%! We’re already there for Sydney. The rest of the country is on the way.
Another leading indicator running hot is the number of Google searches for the term “home loan”. Yep. You can get data on anything these days.
But the Google data does line up nicely with the home-loan approvals data. That makes sense. Search for a loan. Get a loan.
And what the search term data are showing us is that searches are coming back in a big way, and moving with the cycle, are fast approaching boom territory.
But it’s not just in the established housing market. Residential dwelling approvals are also following the flow of the cyclical recovery, and are now up at a 3-year high. Again, approvals are back into boom territory.
In the construction data too you can really see the effects of the housing ‘cycle’.
So the cycle is in full effect. And in 2014 we should see the cycle mature from ‘recovery’ into ‘boom’, and it should be a big year for prices.
But that’s before we take account of some major structural changes that are driving the market hard and supporting this cyclical momentum. I’ve written about these before.
- We’ve got record low interest rates, and the world is awash with EZ money. This money will be looking for somewhere ‘safe’ to park itself. Property has big appeal.
- Self-managed super funds have become serious players, and have a huge, unmet appetite for property. If they jump in all at once it will be a total game-changer.
- We’re seeing unprecedented buying from China. There’s no hard data on the phenomenon, but there are indications that it could have a huge impact on the market.
Anyone of these factors alone could totally dominate the cycle and send us into super-cycle. But all three together..? It starts to boggle the mind. We could be looking at a property super-boom, the likes of which we’ve never seen before.
These are the booms to watch out for. When cyclical momentum combines with major positive structural change.
The kingtide is coming.