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.
Carl says
R u shore ? How long 4 ?
Aaron says
Reckon Jon is so sure he is keeping his money in property. Can an individual show their confidence a more convincing way.
How long? Looking at the previous bottom to top and down again for each growth cycle, about 1.5 to 2.5 years seems standard. Same again? Who knows. If it is a super cycle we won’t know until it has passed I guess.
kevin gray says
Giday Mate,
I have several properties around the country. I live in sydney and have 3 investments in Sydney alone (wish I got in and got more before this up coming boom). I agree Sydney is hotting up, For me personally Sydney is now too dear and you need to pay above what the property is worth.
I do have a property in Gladstone, Newman and Karratha. There is a lot of media around these areas that they are dead in the water (like every market there is ups and downs and i dont agree with these opoinions)
What is you view/opinions of the future of these mining towns. I read data that Karratha is the pick of these three areas, but my performance thus far tells me Karratha is third behind Gladstone and Newman Respectivly
Regards Kevin Gray
Ps. Forgot about another holding, Muswellbrook
Charlue says
Believe or not, negative gearing has killed young Aussies home dream. All other factors are just minimal players.
Danny Raslan says
I live in Adelaide and the closure of holden in Elizabeth is putting a twist on the housing market in that area, I have a rental in Elizabeth and iam thinking of buying 2 more propertys but iam hesitant to do so at this moment iam on a wait and see approach to see if the closure of holden will affect the market. Any suggestions ?
Regards Danny.
Peter says
Jon, Property may have gained some legs in recent times but the uncertainty remains about employment and the big hit yesterday anounced by GMH will surely send shudders through the Victorian and South Australian economies. So as the consumer sentiment surveys are now turning negative, I think there is likely to be further consumer fear that may just smother the green shoots of property value escalation. We may just have seen the best of the current growth cycle for a while and may find interest and expectation in property coming off some what in the 2014. So I wouldn’t be so confident of us seeing a continued acceleration in property values, certainly not if employment rates and manufacturing problems continue to way on peoples thinking although it may still take a few months to show up in the stats.
Ken. says
53 years ago, wages were 15 Pounds a week, that’s $30 per week. At that time, my mother used to tell me that the world waits for no one. Who would have thought that we would be getting almost that much per hour now. The moral to this story is that if you wait for real estate to go down, you miss the boat. Lose your job or not, the world will still leave you behind. Ken.
Frank says
All this talk about employment rates & the manufacturing sector – yes, if you are unemployed or in the manufacturing sector then your confidence to enter the housing market will probably be low, but the majority of people are not unemployed or in the manufacturing sector. At the end of the day its consumer confidence & supply & demand that will drive any market, including the housing market.
Nobody is going to sell their house for less than what they bought it for (unless they are forced to due to personal circumstances – Eg, divorce, deceased estates, lose your job & have to downgrade), people will simply hold for longer if they can’t get the price they want for their property. That is why over the long -term property prices have increased; & whilst there is a limited supply of property (especially in the 15km radius from the Sydney CBD) & demand is high for these areas then prices will inevitably increase.
Ken. says
Spot on Frank, good one. Cheers, Ken.
Wei Li says
How do u think the tapering of US Fed’s bonds purchase affect the Australian property market? EZ money will end when the US limits money supply
Marc montano says
Surely we won’t ever see a repeat of the 1987 boom – Prices doubling overnight?
mark says
Respectfully, does anyone here think much? Why would you possibly celebrate the prospect of aussie resi property rising 20% next year?? That would be a complete disaster…Whats the point in personally making 100 or 200K, if the country’s future prospects are getting flushed down the toilet…
We have so many issues brewing here…
Every day we are getting less and less competitive as a nation, and high property prices are one of the big pillars driving this uncompetitiveness…
How can i encourage people to stop thinking about just themselves for just one moment, and start thinking about the country, about the county’s future, about our kids futures….
Frank says
Hi mark exactly how are high property prices driving uncompetitive ness? The property market is just another market run by the free market forces of supply and demand. I’m also guessing that you own no more than 1 property (if that).
Ken. says
Hi Marc M, The only thing I remember about 1987 was a crash in the stock exchange, not a doubling of the housing market. Is this right. To the other Mark, how old are you, respectably. Worse things have happened than a few companies going broke, like two world wars. The great depression of the 1930’s. Sad but true, nobody, but nobody, gives a rat’s arse about anybody else. It’s dog eat dog, and keep up or drown. Cheers, Ken.
Dean says
Ken, to refresh your memory, in 1987, along with the crash that you recall, interest rates were at 15.50 %, peaking at 17% in 1990. In 1987 negative gearing was also introduced. And there was a significant housing price boom from 87 to 89/90. (perhaps driven in no small part by this negative gearing manipulation by the government). Peeps didnt mind paying 16 or so % on their houses when they were valuing up at like 20% per annum, especially when the value of a house was relatively insignificant . A median house in sydney in 1986 was worth 98,325, to be worth 194,000 in 1990. Mark M therefore seems to be “right” on the money here Ken. Is this right? (source: http://www.econ.mq.edu.au/Econ_docs/research_papers2/2004_research_papers/Abelson_9_04.pdf )
You are however right Ken, when you point out that “no one gives a rats arse about anybody else” I think the other Mark was perhaps suggesting that this dog eat dog and keep up or drown philosophy espoused out there (and seemingly embraced by you?)as the only way forward and encouraged here in this blog and investment sphere is perhaps questionable not only in logic but morality.
It is the same energy that is destroying natural habitat, stripping the seas of fish, salinating lands, polluting the atmosphere, undermining workers rights, glorifying bankers and immunising them from their sins, allowing coca cola to steal poor peoples water to sell to the rich, glorifying corporations and the destruction of national borders for taxation benefits
, killing bees and creating terminator seed technology, as well as denying the aussi kids of today the dream of home ownership. This is to name but a few of the ailments that emerge from this greed is good very selfish self centered complex .
the world we are leaving for our children and grand children is in a dire state.
I agree with Marks heart felt question…” How can i (we) encourage people to stop thinking about just themselves for just one moment, and start thinking about the country, about the county’s future, about our kids futures….”
mark says
Dean, i am heartened by your comments.
To Ken and Frank…..
I am 37.
I earned 100K last qtr (happy to post my last BAS) from my business, and will go for over $450,000 for this calender year. I have 250K in my SMSF. My business at a conservative 2.5x’s EBITDA is worth well over 1M…. So I am a genuine millionaire…..I can on the above basis buy pretty much ANY house in Adelaide…. (Not many properties in Adelaide are worth over 2.5-3Million, representing what i could probably pony up for tomorrow).
So this is not about me. That is the whole point!!!!!!
It occurred to me a little while back that there is absolutely no point in me being wonderfully wealthy, if the rest of the country is going down the toilet.
I have a very long view here.
I am planning for the next 20 plus years….(how many people my age even know what an SMSF is?)
Yes, perhaps “going down the toilet” is a tad strong, but there is no question we are doomed now in Australia for some hard times.
Why?
Because we are hopelessly uncompetitive now on just about EVERY front…
If you cant see how high prop prices and the associated baked in need for high wages, guarantee uncompetitiveness as a nation, then i can’t help you.
What are the 2 biggest costs for a business btw?? Wages and rent of course…
Alan Kohler just produced an article on business spectator yesterday entitled “The price of land is hurting Australia”
Hmmmmmmmmmm
We have big big structural problems that are now baked into the pie…..
The good news for you property speculators is that this will probably take a little while longer yet to play out…
We urgently need as a nation however, to reflect more on this critical issue….
It’s not a dog eat dog world btw…. that is broke thinking….that is scarcity and poverty mentality…
I have had the most success in business and life when i reflect the hardest on how both parties can win…and structure things accordingly…
Ken. says
To Mark and Dean. Thanks for the info. I knew about the interest rates and the “recession we had to have.” The main thing I was trying to say, but didn’t, was that all things become better, for a while anyway, after a calamity. We have just got to work out and act on when to do it. I still believe in learning from the past as my great teacher. Mark, I was by no means inquiring about your personal Information as that is none of my business. I too, have over $1,000,000 in real estate that I personally acquired from scratch. I also watched my father, one of Australia’s famous Rats of Tobruk, give away to anyone who asked, most of what he had, and when I met my grand father, I saw a lot of dad in him. Everyone who came to Beechworth, Vic., with nowhere to go, was sent to him to stay. He told me about two blokes who, when they left, “pinched my sandshoes, arr well, I guess they needed them more than I did.” This was his attitude. I was a lot like this at first also. Still very kind, but knew this wasn’t the way to get ahead. So what I’m saying here is I’m not a heartless person, or a person who is always saying someone else should help other people in need. Cheers, Ken.
mark says
Ummmm, Ken, no one is advocating “giving everything away”… We just need to reflect on how we can make Australia a better place….. And property going up 20% next year will not do this, and will indeed actually make Australia worse off, as discussed……
Ken. says
Mark, I didn’t say you were advocating giving every thing away. I’m simply saying, if you look into the past, there has been a lot of 20% rises in property in the last 80 Years, and it hasn’t destroyed the world yet. I grant your opinion. Also if we or anyone have made an enormous amount of wealth, why don’t we simply just give it away. The only way we can make it better for less fortunate people to get into their own home, is to make residential land much cheaper. Will you be the person to buy a large parcel of land and subdivide it for cost or a little more. If people with your wealth wish to help people, this would have to be one of the best way to help people. I sold residential land in Brisbane for a boss and witnessed a massive increase in prices, just after expo ’88. The only way to help anyone if we really care is like this or in a similar way. Think about it. Cheers, Ken.
ros says
Mark. … you give me faith in next generation xxx