You Don’t Have to Be a Rhodes Scholar, MBA or Economic Professor to Figure Out Where the Property Market is Going… Just read my blog.
It’s amazing what you can learn if you really put your mind to it.
Over the last couple of days, I’ve been doing a bit of a “back to the future” job. Predicting property markets aint that hard when you know what you look for.
But, it’s taking me a long time to… know what to look for.
Back in the day, I used to invest on gut feeling, my personal sentiment and where I was financially, physically and psychologically. However, property investing isn’t a game of golf.
…thank god for that.
It’s all about mathematics, which by the way I’m also hopeless at until you put a dollar sign in front of it.
Yes, it’s quite amazing. It’ll take me a couple of seconds to work out what 7-times-7 is, but if you ask me what 13% of $450,000 is, I can figure it out in a flash.
Anyway, what this lesson is all about is how (from a data point of view), I’ve been able to confidently predict the last 12 months in real estate.
Speaking of 12 months… How times have changed.
Suddenly, all the doom and glooms been replaced by talk of a boom.
It’s a classic paradigm shift. People will hang on to a theory or a view of the world, even as more and more evidence mounts to contradict it. Changing your view is expensive and difficult. But eventually, the evidence against the theory becomes too much, the case against becomes too obvious, and all of sudden everyone changes their view.
This is what seems to be going on in the media right now. There’s been a paradigm shift towards what I, and a handful of others, have been saying for a while now.
So has the media finally got it right?
Well let’s not get too carried away. The media loves sensation. So if there’s no mileage in the line that the property market is imploding, why not run the line that the property market is exploding.
That’ll make the papers sell.
But just because the media’s done a u-turn over night, doesn’t mean that the property market has suddenly swung from bust to boom.
The ‘boom’ that the media is reporting isn’t some flash in the pan, one-off, never-to-be-repeated-prices kinda thing. As I’ve been saying in these blogs, there are some long-run fundamental dynamics at play here.
First of all there are the non-property factors. Things like low interest rates, here and across the world. Incomes rising (faster than house prices), and improving affordability. A credit squeeze on developers that’s keeping a lid on supply.
These are deep and enduring dynamics that will keep property prices on the up and up over the foreseeable future.
At the same time, there are the property factors. Real estate, like all markets for all sort of things, has it’s own trends and cycles. History has a way or repeating, over and over again.
And when we have a look at these factors, we get a sense of where the market is going from here.
I’ve outlined these long term trend dynamics before. But let’s take a quick look at the highlights.
The first is that mortgage rates relative to yields remain very low. When this ratio, which tells you the property market price of money relative to the property market return on money, gets to levels like this, it’s usually buying time.
It’s easy enough to understand. Rents have been growing faster than prices, while mortgage rates have been falling. That means the relative return on investment is improving.
This will start pulling more and more investors into the market, until prices are bid up to be in line with the kind of returns on offer. That typically takes about 14 years to achieve.
On this measure alone, these are the best buying conditions in years.
(For the blog where this chart comes from, see here)
Second, if we look at prices on a very long run, we can see that property is undervalued right now. Look at this chart here:
When we put our house 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.)
It also shows that right now, prices are well below that trend line. And typically, growth returns to trend.
So if property does nothing more than simply return to trend over the next few years, we could expect to see prices growing around 13 percent a year. It would also take the median price in Sydney and Melbourne to the million dollar mark by 2016.
That of course, is just the internal dynamics. We you take into account the record low interest rates and external dynamics, the bounce back could be much quicker, or much bigger than what this simple analysis suggests.
(If you want to read the full article behind this graph, go here)
And how long will the boom last?
Well, if history is anything to go by, we’re looking at at least 7 years, maybe more.
In another article, I had a look at how long growth spends above and below our 8 percent average growth mark. That’s what this graph here shows.
What it shows, is that the periods above and below the trend line are pretty consistent and regular. What we’ve got is:
- 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…
And we’re just tipping towards the trend mark now. Sydney is already growing a 7+ percent year. It won’t be long before we’re back above the trend line. Possible a matter of months.
And if history is a guide, then we’ll probably stay there. We’ll probably enjoy 8+ percent growth for at least the next 7 years. With every chance, as we’ve said, that growth will get up above 13% a year in the near term.
(If you want to read the full article behind these numbers, go here)
This is what history shows us. These are the internal dynamics that are shaping the market right now. And they’re happening at the same time as the external factors, low interest rates affordability etc, are also incredibly supportive.
This is why the next 7 years or so are going to be incredibly exciting. All the stars are aligning.
And how do we make the most of it?
Well, stick with me. I’ll show you a thing or two.