Ok, I only had space for one this time, but it’s a big one. The rest to follow…
So I was telling my friend about a deal I was getting into and he was like, “Hey? Are you buying?!?”
And I’m like, “Yeah, of course I am.”
And he said, “Oh, I was just reading some of your blogs. I thought you were a bit bearish on the market at the moment.”
This surprised me. And so I looked back at some of the blogs I’ve written recently – apartment gluts in Brisbane, flammable towers in Melbourne – and I realised that it maybe had been a little gloomy lately.
But I wasn’t meaning to take a position. I just kind of follow my nose to whatever story is breaking and what’s capturing my attention.
And if you had to take a reading on my position, it’d still be bullish. Even uber-bullish. But that’s mostly because I’m looking at some long run trends. These trends either tend to be boring, or slow-burning, or both.
They don’t make for interesting blogs.
So just to be clear, let me lay out why I’m buying right now, and why I’m buying for my unborn grand-children.
I’ll try keep it simple, but forgive me if we get a little techy.
Duration is a financial concept used in measuring a bond’s value. It’s a way of working changes in interest rates into a bond’s price.
Long story short, the structural decline in interest rates has seen bond prices soar.
Property is the ultimate duration asset. While a bond matures at some point in time, property (like me) never matures. It keeps on generating income from here until infinity.
So how do you value an infinite income stream?
There’s nothing in financial markets like it. They don’t really know how to deal with it.
But what I can tell you is that a lot depends on where you think interest rates are going. If you think interest rates are going to “normalise” – pop back up to their long run average of about 7% or something, then you’re not going to put a lot of value on an asset that delivers an infinite income stream of 3-4%.
But what if you think rates are going to remain low? What if you think they might go even lower?
Suddenly an infinite income stream at 3-4% starts to look pretty attractive.
We’re now almost 10 years on from the GFC. For the first 5 years, most people thought central banks would normalise rates fairly quickly.
But this didn’t happen. Rates remained low, and any attempts even to raise them a little caused massive tantrums in the market.
And so now, slowly and surely, people are getting used to a low interest rate future. Look at 20-year government bonds – they’re offering about 3-4%. That’s where expectations are.
And so as more and more people come round to the idea that interest rates aren’t just magically going to normalise, the more demand there is for property. Not just from mum and dad buyers, but from institutional investors.
After the GFC, in America, we saw a tonne of institutional money head into residential property. Guys like BlackRock became landlords. We’d never seen that before.
And so as more people come round, and as demand goes higher, obviously prices go higher as well.
But do you see what’s happening here? The only driver of higher prices in this model is people’s expectations about future interest rates, and the slowly gathering consensus about our low-interest rate future.
And this is the thing. This process isn’t over yet. There are still people who think that rates will normalise. They believe the Fed and the RBA when they say they intend to lift rates as soon as they can.
(I think they’re dreaming. I think we’ve seen a structural and permanent shift towards lower rates through the saturation of the investment market (we’re not in the high-growth 60s anymore) and continual cost pressures from the production power-houses in Asia.
Technology is winning the race now. It is pushing costs down faster than demand can grow. Prices can only go one way from here. And interest rates will go with them.)
So there are interest rates hawks still holding out for higher rates. But every year rates hold around record lows, the number of hawks falls, and our demand herd grows.
Eventually everyone will come round, and this demand stimulus will have run its course, but the question is, how long will it take?
There’s no real way to know. My guess is that maybe we’re at 50/50 in the market, hawks to doves. Maybe a little more biased our way. Maybe 60/40.
My best guess is that it will take another 7-10 for all the interest rate hawks to come round.
That means 7-10 more years of growing demand – and growing demand from guys like BlackRock with very, very deep pockets.
But I’ve run out of space for this blog. I’ll write more about the other 9 later. There’s a bit to it so I’ll have to find time.
What do people think? I know people value my opinion. Maybe I could make it subscriber only, just to give you guys access to it, and give you an edge over the herd. I don’t know if I just want to be throwing it up on the internet for everyone to read…
Would you want access to a Jon Giaan sealed section? Interested in your thoughts.
Do you see rates on hold? Where do you see the market balance at? 50/50? Or something else?