To All Those Fools Talking “Property Crash” I Laugh In Your General Direction… HA!
I feel like a man who just kicked his toe on a giant chunk of gold. Was going to hold this article till over the weekend…and sent it to you on Tuesday, but I just couldn’t do that to you.
You might have to read this a few times to get it, that’s cool. It’s worth it, believe me.
I have to tell you, as I was researching this I was getting goose bumps…that’s how excited I was, seriously.
I’ve found a simple rule of thumb that’s picked 4 of the most important market turning points in the last 30 years. And what it’s saying now is going to shock you.
And you know why I really love it. It’s based on one of my favourite things.
I can remember a time when negative gearing was all the rage. Some financial planners actually thought there was no other way.
But then folks wised up and realised that, if you could, why not have it all? Why not find a house that pays for itself, and increases in value over time.
It was a ‘trick’ that serious investors picked up on, and indeed, it still seems like it’s the only way to build a real portfolio of properties.
But I know I don’t have to sell you on the power of ‘positive gearing’. (Saul Eslake reckons the whole positive and negative gearing thing is just an Australian thing. Americans can’t understand why you’d invest in something that loses you money… but that’s another story.)
And so since we’re all on the same page, I thought it’d be interesting to have a look at yields. In particular, see if some of those long-run patterns we pulled out of the data last week might be playing out in rental returns as well.
Well guess what? Turns out there are. There are cycles in returns that seem to move in long cycles. And guess how many years those cycles take…
Yup. 18 years.
This is starting to get spooky isn’t it?
And guess what else? Looking at the long-run yield cycle, the property market is a screaming buy right now.
Well, waddya know?
So, let’s break it down.
When I was doing all this research I came across a fellah named Cameron Murray. Cameron’s another professional economist, but he also has some real world experience, having spent a number of years working with a property developer.
(So now there’s two economists I agree with. Maybe I just like the long-haired ones…)
Anyway, Cameron was trying to develop a rule-of-thumb to time entry and exit into the market. And he got to looking at rental yields.
And he decided to focus on rental yields because he was thinking about property from an investment perspective. He was focusing on the qualities property has an investment class.
And so he wanted to put capital growth to one side for the moment and just focus on property’s performance as an income generator.
And what he was really interested in was the rental yields relative to price, as a way of measuring performance. But since he wanted to strip out capital values (remember the exercise is to try and pick tops and bottoms in price), he had to find something other than house prices.
So what did he use?
Mortgage rates. Why? Because when you’re buying a house, unless you’re buying it outright, the mortgage rate is effectively the price of money.
And so now you have a way of comparing the return on your money, with the price of money, taking capital values out of the equation.
Pretty neat, hey.
And this measure then gives you your signals. When yields are high relative to the mortgage rate, then it’s going to be a good time to buy. When it’s lower, a better time to sell.
Phew. Little bit techy. But we got there.
And what did he find? Well, now you’re in for a surprise.
Have a look at this chart here (taken from a blog he wrote for, MacroBusiness). This is the mortgage rate divided by gross yield. It’s a bit topsy-turvey, but a higher yield, gives you a lower reading. A lower yield, and the ratio increases.
Cameron’s then drawn his own (kinda arbitary) buy (green) and sell (red) lines on the chart.
Yes, yes, that’s all well and good Professor Numnuts, but does it work?
Ok, well, imagine you followed its advice. Buy at the green. Sell at the red. You would have bought in the early to mid eighties, at the market bottom. Then you would have sold in 1988/89, just before the late eighties crash.
SIDE NOTE: Now I would never sell property… I’m a keeper. But lets say you where a developer, how great would it be if you knew when to load up on projects in a big way…
Check your arms… got any goose bumps…exciting S@#$% hey!!
Taking your wads of cash, you would have then bought in the late nineties just as things were kicking into gear again, and then you would have sold, perhaps a little early, in 2003, or again in 2007, just before the doozy-drop.
And you would have made a truck-load of money.
A simple rule of thumb that can get the timing right on those four occasions, across over 30 years in the market, is doing pretty well in my books, I reckon. Nice work Cameron.
The other thing that my readers might find interesting is the repetition of a classic “head and shoulders” pattern. And how often? 18 years.
Seems that Cameron’s model is tuned into the same rhythm Phillip Anderson’s model is.
Makes me wonder why no one else has noticed this.
Anyone else smell a conspiracy? I’m going to start writing these blogs in code and wearing a tin-foil hat to protect my thoughts.
Seventeen east windchime porkchop.
But the real juice in this story is where this measure is at right now. Take a look again.
Right now, Cameron’s measure is back down at a screaming buy. The lowest it’s been since the late nineties.
This is not theory or opinions this is real money-making, actionable information…and if you’ve been following my blogs, you’ve got more than enough proof to explain why these are such great buying conditions.
Best buy in 18 years…?
It’s all pretty interesting stuff, hey?
But I’m going to sign off there. I think I can see someone going through my garbage.