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?
Leo says
Hi Jon, The CEO of the ANZ Bank recently told a group of boffins that the usual trend in house price rises is ‘finished forever’. Well I don’t know about ‘forever’ it’s pretty unpredictable. I do know history points to a second recession after spending picks up and confidence comes back. That’s when inflation traditionally takes off like one of those rocket things you were talking about. I have no real fear of recessions, why? Well if a company makes $100 million profit, then next fiscal quarter it makes $99 million profit, then again in the next fiscal quarter it makes $98 million profit, they call that a recession. I think $98 million is still pretty good, don’t you? I say any profit above inflation keeps the value of your dollar constant , at least.
Almost every multi-millionaire buys property, cause it’s generally seen as the safest place to park wealth.
I say, if it’s good enough for them, it’s good enough for me.
Thanks again, Leo
Alan says
I’d like to believe you Jon but who’s to say that the peak in 2010 was a much reduced “above the trend period”, cut short because of the continuing fallout from the GFC. If that’s the case, we could be just starting another 7-year below the line period ? Hindsight is a wonderful thing…but I hope your optimistic view is correct !
Tim says
Firstly, well done. some analysis is better than no analysis.
I guess for me the safest thing to do when you are considering buying but not 100% sure of the next market move is to buy cash flow positive. That way even if the value of the property decreases, you still have the flow. If you lose your income/job and there is cash coming in, the urgency to sell is reduced.
However, i think there is more macro economic issues at play here. The Value of the AUD reducing has an effect, and many many other things.
Grant tracy says
I think you are right we are heading for another growth cycle of 7 years. New govt and low interest rates and rising rents all point towards it
Barry Morris says
Hi Jon, I can’t help but respond to some of the above comments,
Tim your spot on… If you buy positively driven property your as safe as you can possibly be, if you buy positively driven property that can be improved with a coat of paint, maybe a new kitchen or bathroom, a tidy up of the yard then you can improve the equity as well….. So now you not only have a property that is returning a profit but one that has a greater comfort zone should it be a requirement to offload.
Alan your also right… It may be so that the next 7 years of down turn may have started in 2010 leaving 2017 before we see the traditional rise, so lets look at this from a different angle…. Consolidation…. Consolidation is often thought of by my friends as an end goal, buy enough investments, when your old it is time to consolidate it all, but I contend we have continual or reoccurring moments when we should be consolidating and those moments are the times such as we have now, still at the bottom of the market, consolidating with more positively driven properties and we increase our position to purchase another.
Broaden our base as much as we can now so we can ride the rise when it comes… So if the rise as Alan suggests may be another 4 years away we have the perfect moment to either consolidate our foundation with more affordable and positively geared property or at the very least improve the value of our existing properties which then allows us to acquire more.
One thing is certain, property does go up and down but over time it always shows a rise in capital value, the point in case… I just bought or will have on the 26th of this month the family property from my late fathers estate, it valued up at 380k needing renovation, I have spent 10k over the last 6 weeks and yes a lot of personal labour and it now values up at 550k market value.
6 weeks and I have 160k to play with towards my next bottom of the market purchase …… The kicker here was I found the original sale contract when my parents bought this house in 1972 and the price was $15,500… Yes that was 41 years ago but if your around 40 years of age now what will your properties be worth when your 80?
My large point here is I don’t mind if Alan may be right and it takes until 2017 before prices rise… My task is to acquire as many as I can before then cause if Jon and Grant Tracey are right my time is running out to snap up more bargains and I will have to wait the 7 years for the next bottom…… That’s going to be sad and the biggest regret as Jon has pointed out in his later blog.
Leo, can’t leave you out lol…… Your right if its good enough for them it’s good enough for me as well!…… Here is another angle on your downturn…..in the times when we had 11% unemployment that meant we still had 89% of the workforce employed!!!!!
Jon, keep it up, we have not met yet but that will happen