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.
Yields.
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.
Michelle H says
I really like your blogs & Articles. They are interesting , Insightful & Informative. Also very humorous, & there’s. nothing like a great Laugh to keep a positive & Proactive mind.. Cheers Michelle H
Phillip Woodhill says
I say …..A trend is a self-fulfilling prophesy …. And if enough people read the blog and follow the trend then you see it happen. We create our own market, everyone’s happy until last on the bus has no- one to sell to and everyone then hops off the bus.
And that my friend is a market …. Stocks, property, bonds, whatever…. We all create it but only the smart ones make money out of it!!!! Get on early but don’t close your eyes or you will not get off at the right stop
Robert Ferguson says
Is property really the place to invest? buy your own home but thats it
steve LP says
Great graph have you got anything for todays market till june 13
joe peteranovic says
Hello
the past performance doesnt guarantee a repeat in the future !! So crystal gazing into charts is a fools paradise !!
Hype and herd mentality usually creates booms ….which is what John Gian is hoping for
One thing that should be highlighted is …. with these record low interest rates more tennants are becoming owners …getting off the rental train as the mortgage is inline or cheaper than renting
This means fewer tennants for us investors making it harder to find good tennants and possibly putting downward pressure on rents
Supply and demamd no. 1 rule
cheers
Joe
Roz says
I commend you for sharing your knowledge but would being time poor I would
prefer you to get straight to the point rather than using a chatty style. This is why I have unsubscribed from your service today.
Lee says
Joe is spot on in his comments , look at latest Fijitsu report, there are over 200000 home in Mortgage Distress, these are coming onto the market at discounted prices of over %30, these will drag prices. I know for a fact about these properties as I help these people try and save their properties. All these people got caught up in the last bubble. Consumer confidence is shot, mines laying off staff like a Liquid Amber tree in winter, wages have rose in last 7 years. How can they possibly buy even more expensive homes
Graham says
Hmmm, by more accident than design, my buying and selling has more or less co-incided with the buy periods in your graph. Its not due to reading the market but more to do with the feeling of well being you pick up from the general public.
What I need to point out is that in my opinion, NONE, of the buy times previously have managed to co-incide with the drop in the viability manufacturing industry in this country and the number of lay-offs that are happening now. The drop of the Aussie dollar will help to some degree but I cant help but think of the HUGE and increasing number of people who are now out of the real estate market or will be soon out of the market due to lack of employment.
I beleive you need to graph the consumer confidence data against those dips and falls as well as the exchange rate to really gain an understanding of the market. To talk up the real estate market at this stage is pretty bullish and maybe solely based on your personal situation which from your reports is pretty damn good.
Without normal people feeling better off, this sort of blog is just HYPE !!!
This country is heading toward a precipice. Service and import industries do not create jobs long term. A lower exchange rate and increased local manufacturing in essential industries like food, does. Tried to buy local canned fruit lately?? Try to buy a locally made car in 5 years………….. Its all dying……a slow death.
Before long the skills, factories and knowledge to manufacture what we took for granted in the past will disappear and we will be at the mercy of imports for normal items BOUGHT WITH A LOUSEY EXCHANGE RATE.
Read this as MASSIVE COST OF LIVING INCREASES to come. This on top fo the rogering we are receiving with utilitie price increases, does not paint a rosey picture for housing affordability.
The real estate booms of the last 10 years relate more to the low exchange rate and subsequent influx of Chinese/Asian money buying houses. Without that there would have been NO housing booms over the last 10 years…..
Comments please ……………
joe petranov says
Yes Graham i echo your concerns as well
99% of businesses and people ive talked to last 3-4 months are totally disillusioned by the current Govt and economic conditions…..consumer confidence is low for sure !
Cost of living is increasing … always will
Property is selling mostly to Asian investors coz their laws restrict them from investing in their own country….so they go where its stable and safe …Aus
I dont believe we will see property price increases that happened in the 70 – 80 – 90s ….the world market fundamentals are changing ….debt is increasing virtually everywhere in the world ….the whole world is heading towards a precipice ….
Hype …creating hope ….. talking up the market etc is mandatory for the rich to get richer while the poor struggle on in hope of better days
These r interesting times we live in… CONSUMERISM and self indulgence are prime driving forces of society
anyone concur or have an alternate view?
Joe
Lee says
Joe I agree, Im dealing daily with people going MIP, the numbers are staggering, this is our website just to clarify what I do . http://www.arap.com.au
Cheers
Lee
Donald Ferguson says
Dear Jon,
your writings are great. Always positive and that’s the best way to write and think. The naysayers get nowhere in life. So its always better to be a goer than a woer. I have no idea about what property and share prices will be in the future; but if one buys quality assets; at fair prices; without getting over committed with debt; that’s a good way to go. Good luck to you; and to all the readers of your articles.
astrogurl says
Basically conforms toKuznet’s infrastructural investment cycles, or one season of The Kondratieff Cycle.
GS says
Please Jon, if you serious about real clients to listening to you, please…please be short in your briefs. Serious people got no time to read your long-winded marketing jargons..!!! Please be to the point!
Ganga
Patrick not Warren says
No post available yet for “How I let Buffett manage my money” so I have left my comment here, feel free to repost to the correct subject when it becomes available
Hi Jon,
Reading you e-mail “How I let Buffett manage my money” you claim that you made 42.8% profit.
It is curious to me how you achieved this, because going over Warren Buffett’s own Berkshire Hathaway Corporate report for 2012 he lists his total return since inception of his fund, but how has he gone over recent times?
To me he is living off past glory, lets go back over the last 10 years and see exactly what sort of returns he has achieved:
2003 = -7.7%
2004 = -0.4%
2005 = 1.5%
2006 = 2.6%
2007 = 5.5%
2008 = 27.4% (When the market crashed)
2009 = -6.7%
2010 = -2.1%
2011 = 2.5%
2012 = -1.6%
That’s an annual average of 2.1% better than the market, wow the world’s greatest investor outperforms the market by 2.1% annually over the last decade, whoopy doo let’s break out the champange, seriously.
So if he is getting these astounding returns, how are you claiming to have made 42.8%, riding off his coat tails, because clearly he isn’t making that much, maybe you should be sending him this e-mail and inviting him to your webinar, because I’m sure if what you say is true, Warren Buffett should be taking advice off you!
Patrick
jessica says
It’s very interested to read your articles, however, I still worry about the warning of Australia Reserve Bank ” Australians have invested heavily on property and shares to earn easy money; this made manufacturing suffer. This is over now”. They have the power and they will make it happen. What do you think?
JT says
Ganga/GS:
If you’re interested in anyone ever listening to you in life, learning to speak in clear sentences with decent English is a key skill worth mastering.
Also, listening is an even more important skill and Jon’s posts were not that long, and contained all the required information in a fairly concise manner. No-one is actually forcing you to read them so you can go right ahead and not read them if they are too onerous for you.
Wiebke says
It really encourages me to know that I can put myself ahead of the game while others are waiting for guarantees, lamenting the government, world debt, unemployment.. – one topic missing in the comments is how poorly China is doing lately.
Jon, love your blogs, and love your writing style!
joe petranov says
Good point re China’s growth slowing !
Get in ahead of the game but b prepared for a long wait and dont expect fireworks anytime soon
David says
Hi Jon,
Also love your style you are definitely way ahead of the pack.
There is always going to be a nay say’er like Patrick maybe he
could enlighten us on some of his investment strategies.
David.
Patrick not Warren says
@ David
You may not have seen the post I was responding to. Jon’s article below said:
“Recently I told you how I made 42.8% riding on the coat tails of the world’s greatest investor, Warren Buffett.
Surprisingly, anybody can do this. It’s easy.
Simply buy shares in Berkshire Hathaway (Warren Buffett’s investment company).
…but, had I don’t (sic) that, my return would have only been 26%.
So what gives?
Well, of course there was leverage attached to the trade, assistance, advice and a bit of hand-holding going on.
Basically, somebody else did most of the heavy-lifting for me. (I told you I’m not that smart).”
Firstly I do admire Jon, it’s always good to see a multi-millionaire sharing his thoughts and advice.
I mostly do like his writing style, although sometimes he does ramble a bit, but I accept that as part of his personality AND it’s my choice to read it, he’s not forcing me too. (@ Roz & GS Ganga)
David having read the post from Jon, maybe you will understand my point a little better.
The figures I quote were how much Buffett has outperformed the S&P 500 by in % terms.
You will see his COMPANY has only done 2.1% better on average in the last 10 years, however his SHARE PRICE has done better (about double).
According to Jon if he had have bought BRK.A and held he would have only made 26% (on the share price), not 42.8%, so where is the extra coming from (BRK.A doesn’t pay a dividend)?
This, to me, looked deceptive and I thought I should bring it to Jon’s attention as well as his readers.
Buffett is living off his reputation as he has become too big to buy anything but BIG companies giving good returns. He is the elephant in the room.
As for me being a nay say’er (@ Donald F also), I disagree, but can see how you might think that. I believe I was pointing out the facts so people weren’t being misled.
If you want me to enlighten you on some of my investment strategies, then ok, but they’re two tiered.
Basic and advanced.
Basic is all the little simple things that everyone should do, like:
Have a budget and stick to it.
Don’t take out a loan for a car (it depreciates and you pay interest on it)
Don’t smoke (your are paying money to slowly kill yourself / make yourself sick)
Don’t have any credit card debt.
Work hard, makes it very unlikely you will get the sack, thus protecting your main income stream.
etc..
Yes pretty simplistic, but how many people actually do ALL the above?
Advanced:
I’m not a big fan of property, even though I have made good profit out of it.
The main reason is real estate agent commissions, government taxes and conveyancing costs; this “brokerage” in my eyes takes away too much of the profit you have made.
I prefer shares, the trading costs are significantly lower, and the correct share makes more profit in a shorter period of time.
How do I do this I hear you ask Dave?
I will relate this answer back to something most readers of this blog can relate to, property.
Let’s say I buy a property (share) worth $600,000, but has a mortgage (liabilities) of $200,000 on it.
That gives an equity of $400,000, well I pay for the equity portion only, but wait it gets better!
I buy that equity at a discount, say $300,000. (yes they do exist)
Most property type investors think the sharemarket is risky. Ask yourself, if that share was a property would you buy it?
The answer should be YES and bucket loads please! A $600,000 property (share) for only $300,000 I reckon you’d be mad not to. Which way do you think the price would go?
So Dave I hope you are enlightened about my investment strategies now.
For Roz & GS Ganga, sorry I am starting to go on like Jon now, so I’ll sign off.
Patrick.
Pauline says
@ Patrick not Warren, I agree with your other basic strategies, BUT I MUST take issue with your “Work hard, makes it very unlikely you will get the sack, thus protecting your main income stream”.
Try telling that to the hundreds of workers who have recently been sacked in the government sector, the car industry and the retail industry!
Taking responsibility for your own financial wellbeing is the only guarantee of securing your future. Investing in your own business, educating yourself about property and the share market and taking calculated risks are responsible decisions.
The only person who can take responsibility for your life is yourself. The biggest mistakes I’ve made in investing were made because I lacked the knowledge I needed. I handed over responsibility to someone else.
I don’t do that any more.
I educate myself, I listen, I discuss and take a lot of advice with a good sized pinch of salt.
Jon, I really enjoy your blog. I like it’s refreshing honesty – you are speaking YOUR truth. And I enjoy the debate it sparks from others. Keep up the great work.
Patrick not Warren says
@ Pauline, you may have missed the point I was trying to make; which was one of the basics of work.
If there are two employees, one slacking off and one working their butt off, which one do you think will be more likely to get the sack?
Whilst I sympathize with the Ford workers (and the Holden workers in the future) and others that are victims of political decisions that had nothing to do with their personal work ethic. This isn’t always the case as you correctly point out.
For more on the future of Holden workers see a recent interview with their GM Mike Devereux on Inside Business
http://www.abc.net.au/insidebusiness/
Read between the lines and you will see no matter how hard they work they are doomed.
The light at the end of the tunnel is a train coming towards them, not a spotlight about to shine on their hard work. They should be trying to get out of there IF they can, I wish them luck.
Patrick