I never thought I'd see the day. Satan's wearing ugg boots this morning, because I've found an economist I actually agree with.
The other day, in one of my posts I noted that 4-5 year downturns in the property market, like the one we've just seen, are not that unusual in the scheme of things. If you look back over the past 20 or 30 years, they come around fairly often.
As such, there's no need to panic and start piling into the lifeboats just yet.
But as it turns out this pattern of 4 or 5 year pauses has been going on…well, possibly forever.
I've been looking into the work of economist Phillip J Anderson. He's had his hard-hat on and has been digging around in 200 years worth of American and Australian property data.
What he's dug up is the equivalent of an alien space craft. It's creating a helluva buzz (and there are spooks in suits and sunglasses all over the place, trying to shut it down).
With the data he's got, he reckons that property's been moving in 18-year cycles for as long as he's got data for – back to 1800 in the case of the U.S.
And it always plays out the same way. 14 years up, 4 years side ways. 14 years up. 4 years sideways.
He reckons you can set your watch by it.
Take a look at this chart here. It looks at the volume of American public land sales between 1800 and 1923 (there's not much reliable price data that goes back that far, so volumes will have to do…)
What you can see playing out, again and again, is a speculative boom and bust. The markets gets red hot, then it collapses. Round and round it goes.
And how long between the peaks in sales volumes in the chart above?
18 years. Almost on the dot.
And he reckons that what we've seen over the past 4 years, is just the regular sideways phase in his model. Nothing out of the ordinary.
… So I started thinking, I have been telling you that this period right now reminded me of the early and mid 90's period… If his theory is correct, let's see how it lines up even more during that period of time.
Here we go.
1987. We had a massive stock market crash.
1988-90. We had a massive real estate bull run, culminating with crazy interest rates of up to 18%
1990-91. Real estate prices crash and the country goes into a recession.
1991-96. Markets go no-where, interest rates come crashing down from the insane highs of 18% to 6%
1996- 2000. Real estate prices recover and strong appreciation after 5 years of not much happening.
The stock market surges as well.
2000. Tech wreck… stocks take a break, but real estate continues to grow.
2004. Another top for real estate… a bit of a pause and then continue to grow in prices…and then…
2008. The GFC hits and everyone is asking WTF is going on…Markets crash globally.
2008- 2009. The end of stock market highs and real estate stops dead in its tracks.
Okay, you with me so far…?
Let's do the numbers, based on Phil's theory.
1991-95. That would make it 4 years of down turn and recovery. TICK!
1995-2008/9. Prices move from lows to significant highs…13/14 years. TICK!
Mmmmmm isn't that interesting… the 18 year cycle plays out again…scary!
* Real life example: I bought 2 bedroom single front in Brunswick Melbourne in 1997 for, $104,000 sold it in 2004 ( don't ask, it was against my will ) for $349,000. Probably worth $550,000 today…
How's that for appreciation $104,000 to $550,000 in 14 years…
And we are at the starting point once again on the verge of a significant BOOM !
So there you have it. I agree with an economist. Mind you, he's not your usual economist. He wears his hair a bit long, dresses casual, and is a bit of a renegade in the industry (you can see why I like the guy, can't you?)
It got me wondering, maybe there are similar cycles playing out in the share market. Turns out there are.
Have a look at this chart here.
What this shows is that there are regular 16-18 year bull/bear cycles in the market. Things go up for 16-18 years, then they go sideways for 16-18 years.
A bull and a bear chasing each other round and round on a merry-go-round. Just like clockwork.
There's a couple of interesting points to note about this, I reckon.
The first is that the last bear run kicked off with the bust of the dot-com bubble around the turn of the millennium. That means, we're probably not going to see a solid pick up in shares til about 2016.
The stock market has been trying, but it's having trouble busting out its holding pattern.
That's also been my feeling for while. Stocks are laying the ground for another big run, but we're not quite there yet.
The other interesting thing in this, is the “phase synchronisation” that's happened, with the downturn in the 18-year property cycle coinciding with the middle of the bear run in stocks.
Bam.
That would explain why we just had such a doozy of a down-turn. And why that doozy created the impression of total system collapse. Two major markets moving into down-phase together…
The curious and sceptical side of you might be wondering why these markets move in these particular 18 and 32-year cycles. What's the significance of these numbers?
Why is it so?
It's a good question. Phillip J Anderson doesn't know the answer. And that makes his pointy-headed economist colleagues a bit sceptical.
If you can't explain it, can you rely on it?
But the world is full of mystery. And the human world is full of patterns.
It's just one of the quirks that emerge as humans perform the monumental miracle of making the world tick over. We construct standardised time, trading sessions, a regular work week. We gear into quarterly reporting seasons, financial and calendar years, create repayment schedules on our mortgages over 20 year time frames.
Little patterns create bigger patterns.
A 1-year becomes a 5-year term. A population of mortgages organizes itself into 18-year cycles.
Maybe so. It's no so hard to believe.
But you know me, I like to get behind the data and know what's going on.
And what I like about Anderson's model is the driver of the dynamic – credit. The key thing that seems to drive the 4-year downturns is a credit crunch. Time and time again.
A credit crunch just like the one we've just seen.
And if you look at the finance data, a credit crunch just like the one we're steadily on the way out of (check out my article from a few weeks ago if you don't believe me.)
And so there's everything to suggest that we are well on the way into another 14-year boom in property. And once the stock market swings into a bull phase, from 2016 on, a boom in equities as well.
And when the two combine, each amplifies the other, into some sort of mega-boom of awesome.
I've used the line before, but the stars are aligning, and now history is on our side.
It's a great time to be alive.
D says
Sounds just like Elliot Wave Theory, although I’ve only ever heard of EW applied to the stockmarket, (until now.)
James says
Love your articles Jon… Have built a sizeable property portfolio through hard work and persistence and am now looking forward to the years ahead. Increased Capital Growth = Increased Wealth. Increases in Rent = Increases in Cashflow. Let the good times roll I say!
JR says
I have always thought there were ebbs and flows in the property market – but I had noticed it to be in 10 year cycles – interesting the read that it is actually 14 year cycle. Thanks for the clarification.
Theresia Jordans says
I’m in a situation where I have to sell because my mortgages have gone pear shaped due to maintenance and subsequent vacant property, followed by maintenance issues – not being able to pay for property maintenance. Can you suggest a way to short circuit this need to sell ALL of my properties? Maybe a JV to fix the maintenance? The properties are in COOBER PEDY (site of huge 23TRILLION dollar oil find – Linc Energy) and Opal capital of the world, plus 2 in MURRAY BRIDGE and 1 in Queensland (Charters Towers/Queenton) – maybe sell my ppr, use that to pay out mortgages, renovate the properties. The problem I see with that is I dont know how long it will be before the flow-on happens (except there have been many houses sold since the news and vacancies are low. AND infrastructure has started in the form of new railway lines) Holding costs could blow the profits?
AO says
Hi Jon, always look forward to your articles and point of view. Anderson’s ‘real estate clock’ as you’re probably aware is actually based on WD Gann’s ‘financial timetable’ penned in 1909 which with uncanny accuracy shows long term commodity cycles up to our present day. My oppinion is that as sure as death and taxes, history in certain regards seems to always repeat itself. I’m currently awaiting a DVD presentation in the post by Anderson entitled ‘Remembering the future’ and very much looking forward to digesting it. Even though we’re living through some very uncertain economic times I can’t envisage the predictability of history abruptly ceasing in our day and age unless we go through some sort of Ice age or major extinction.
Cheers, and keep up the good work.
Mickey says
get rid of the 2x murray bridge properties look for something with cashflow mayb cheap 2 bedder unit, i would say if u think this is going to be such a winner. otherwise sacrifice will have to be made that means ppor 🙂
Theresia Jordans says
Hi Mickey. I have the units on the market. The properties in Coober Pedy are tenanted except for the one that needs a fair bit of work. What do you mena by ppor? Cheers
Kim says
So, do we hold if we can for now and if affortable buy more in one year’s time?
Jason says
Hi all,
AO, perfect reference to the Great man himself, WD Gann; The Master of Cycles.
Thanks for the article Jon.
Jason
Tony says
Hi
I think if you need confirmation of Jon & Philips forecast then you should check out Steve Keen’s website – he believes that acceleration in credit is a primary driver in real estate prices – and in a recent post, he says that credit is accelerating. House prices will rise – from the perma bear himself.
Tony
Ken. says
I bet nobody has ever had a house in a normal city or working man’s town, go down in price or value over a 7-10 year period. Theresia, sell excess vacant land more than a 1 to 5 ratio with rental houses. I personally, don’t like units, as I believe Body Corporate fees and maintenance will keep you broke. In 1948, the year I was born, houses cost $800, in early 1970, in Brisbane, they were $8,350. So if this doesn’t tell you anything, nothing will. Jon is spot on as always. In Cairns, you can still get Cheap houses to live in for $200,000, or $350,000, if you want what your grandparents have got now. Ken.
Theresia Jordans says
Thanks for your comment ken. I’m not sure what you mean by “sell excess vacant land more than a 1 to 5 ratio with rental houses.”. and I THINK you are suggesting to hold so that by the time I get to my grandparents’ age they will be 10 times the value. Trouble is I AM (just about) my grandparents’ age LOL (Born 1947) Sometimes I think I would like to hold on to the Coober Pedy properties because of the Oil Find but then I feel I can’t afford the holding cost until then, although all the properties, bar 1, are now tenanted. I think I have found a lifeline in Lee Scott though, so say a prayer for me? Cheers, Theresia
Theresia Jordans says
The holding cost for Coober Pedy are because of my financial situation, not because of the investment opportunity there. The holding costs would now really be non-existant except that I need to fix up one of the properties and the income from the others may get eaten up by that. Hope that clarifies the affordability of holding in my previous comment. Cheers, Theresia
HAWK says
TJ:
Any options to refinance your “best” property, use the equity released & hang on for dear life? Your position is only temporary…. & in 5 years all this may seem a blurr/blimp as you bask in your improved position.
Ken says
Theresia, Definitely keep at least one Vacant property at Coober Pedy if possible, and all rental houses there. I think you are sitting on a small gold mine there. I’d sell Murray Bridge if they are the maintenance problem you mentioned, but this depends on rental income. I see you are probably a grandparent like myself and If I lived in Murray Bridge I would give you a hand to renovate. That’s just genuinely the type of bloke I am and I hope someone down there cares enough to help you out. I live in Cairns. Good luck, Ken.
Theresia Jordans says
Hi Ken, I have the Murray Bridge properties on the market. They don’t need any maintenance a this stage. It is one property in Coober Pedy in particular that needs considerable work, 2 others need minor attention. All are rented at the moment, except for the Cameron Drive one. According to the land agent it would rent for at least $250 pw,.more if I could develop it as I would like. Unfortunately I don’t have the funds. Also I am single no kids just lots of nephews nieces and great nephews and nieces. I’ll just have to sort it out myself. Thanks for the good wishes.p.s. The vacant properties (land) are not bringing in any money except by selling them.
Theresia Jordans says
Hi again Ken,
It would be great if you happened to be in either COOBER PEDY or MOUNT BARKER so we could chat! (Mt. Barker is home and CP is the main investment area with the problem areas.) Oh well!
Ken says
For sure property can only and ever go up for eternity, outstripping fundamentals like price to rent and price to incomes. Property never goes down of course it only ever goes sideways and goes up again. And of course history always repeats itself in neat cycles no matter what the prevailing circumstances so I am going to lever up again and double down in the house. This is some excellent advice thanks for sharing