Ok, I only had space for one this time, but it’s a big one. The rest to follow…
So I was telling my friend about a deal I was getting into and he was like, “Hey? Are you buying?!?”
And I’m like, “Yeah, of course I am.”
And he said, “Oh, I was just reading some of your blogs. I thought you were a bit bearish on the market at the moment.”
This surprised me. And so I looked back at some of the blogs I’ve written recently – apartment gluts in Brisbane, flammable towers in Melbourne – and I realised that it maybe had been a little gloomy lately.
But I wasn’t meaning to take a position. I just kind of follow my nose to whatever story is breaking and what’s capturing my attention.
And if you had to take a reading on my position, it’d still be bullish. Even uber-bullish. But that’s mostly because I’m looking at some long run trends. These trends either tend to be boring, or slow-burning, or both.
They don’t make for interesting blogs.
So just to be clear, let me lay out why I’m buying right now, and why I’m buying for my unborn grand-children.
I’ll try keep it simple, but forgive me if we get a little techy.
1. Duration
Duration is a financial concept used in measuring a bond’s value. It’s a way of working changes in interest rates into a bond’s price.
Long story short, the structural decline in interest rates has seen bond prices soar.
Property is the ultimate duration asset. While a bond matures at some point in time, property (like me) never matures. It keeps on generating income from here until infinity.
So how do you value an infinite income stream?
There’s nothing in financial markets like it. They don’t really know how to deal with it.
But what I can tell you is that a lot depends on where you think interest rates are going. If you think interest rates are going to “normalise” – pop back up to their long run average of about 7% or something, then you’re not going to put a lot of value on an asset that delivers an infinite income stream of 3-4%.
But what if you think rates are going to remain low? What if you think they might go even lower?
Suddenly an infinite income stream at 3-4% starts to look pretty attractive.
We’re now almost 10 years on from the GFC. For the first 5 years, most people thought central banks would normalise rates fairly quickly.
But this didn’t happen. Rates remained low, and any attempts even to raise them a little caused massive tantrums in the market.
And so now, slowly and surely, people are getting used to a low interest rate future. Look at 20-year government bonds – they’re offering about 3-4%. That’s where expectations are.
And so as more and more people come round to the idea that interest rates aren’t just magically going to normalise, the more demand there is for property. Not just from mum and dad buyers, but from institutional investors.
After the GFC, in America, we saw a tonne of institutional money head into residential property. Guys like BlackRock became landlords. We’d never seen that before.
And so as more people come round, and as demand goes higher, obviously prices go higher as well.
But do you see what’s happening here? The only driver of higher prices in this model is people’s expectations about future interest rates, and the slowly gathering consensus about our low-interest rate future.
And this is the thing. This process isn’t over yet. There are still people who think that rates will normalise. They believe the Fed and the RBA when they say they intend to lift rates as soon as they can.
(I think they’re dreaming. I think we’ve seen a structural and permanent shift towards lower rates through the saturation of the investment market (we’re not in the high-growth 60s anymore) and continual cost pressures from the production power-houses in Asia.
Technology is winning the race now. It is pushing costs down faster than demand can grow. Prices can only go one way from here. And interest rates will go with them.)
So there are interest rates hawks still holding out for higher rates. But every year rates hold around record lows, the number of hawks falls, and our demand herd grows.
Eventually everyone will come round, and this demand stimulus will have run its course, but the question is, how long will it take?
There’s no real way to know. My guess is that maybe we’re at 50/50 in the market, hawks to doves. Maybe a little more biased our way. Maybe 60/40.
My best guess is that it will take another 7-10 for all the interest rate hawks to come round.
That means 7-10 more years of growing demand – and growing demand from guys like BlackRock with very, very deep pockets.
So the boom has at least 7 years to run on this model.
But this is just one factor. I’ve got 9 more!
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But I’ve run out of space for this blog. I’ll write more about the other 9 later. There’s a bit to it so I’ll have to find time.
What do people think? I know people value my opinion. Maybe I could make it subscriber only, just to give you guys access to it, and give you an edge over the herd. I don’t know if I just want to be throwing it up on the internet for everyone to read…
Would you want access to a Jon Giaan sealed section? Interested in your thoughts.
Do you see rates on hold? Where do you see the market balance at? 50/50? Or something else?
Brian says
50/50 is about right. You have also failed to mention that over the 7-10 year cycle any property should be generating positive cash flow even if you have made interest only payments. Once it is positive cash flow my personal goal is to then start paying the principal down. Takes about 20 years but if you keep the positive income paying principal no matter what you are in the lead.
Chetan says
Good read , but it explains one part of the story ,the RBA rates are on hold but Banks are on free run . apart from big pocket guys ( like blackrock you have mentioned) the general investor depends on equity fetch to feed buying frenzy market , given interest rise on IO loans and new serviceability calculations , it would be much harder to these investors to remain in market , the ROI will go lower and lower and risk will increase , not to mention the tug of war going on between Bank and Government takes down the consumer confidence( if nothing else),one thing i have learned over time ( and i may be wrong) that property is not just a game of fundamental but also a market of speculation ( sydney is best example ) ,nevertheless good read.
KiwiAl says
Hi Jon,
Good way to gauge the market – make a controversial statement!
The property cycle is normally about 10 years. As I see it, we’re just past mid-way, maybe 60% of the way from one low to the next. In other words, just past the peak of the current cycle. That means normally, prices would go down from here, or, at least stop, while the prices of other assets and commodities go up, effectively meaning property prices erode.
However…. We are not living in Normal times. The world is starting to over-speed, thanks to Technology.
Have you noticed how, over the last maybe 30 years, the pace of change has accelerated? Every year, computers are bigger, better, faster. We, people, have to run faster as a result. More and more, we expect things instantly. For example, Letters and Post are almost a thing of the past. They are too slow, too inefficient.
Then, along came the Trump/Clinton effect. A kind of insanity. A disregard for rules and proper behaviour. A sign of the times.
Things were going too fast, now they are becoming too loose. We used to have courts to hold things in check. But they are now also way too slow. So they are becoming relics of the past as well. Too slow, too expensive, and they don’t give me what I want anyway, so why would I bother?
Fast and Loose. That’s the future.
It’s a scary one!
I wouldn’t count on anything being predictable.
The real powers that be on this planet are still the same, and they have their own agenda, which, effectively, is to own and control everything.
Increased volatility (and having the control or at least the understanding of that volatility) creates huge opportunities to further those goals.
Yep, Fast and Loose.
My 10 cents.
ron goddard says
hi jonno,
r.i.p. Retirement In Pensions:-) that means when you are told you are too old to work you get a pension. now today’s pension wouldn’t feed a baby rat given the myriads of charges etc. abundant in our ‘society’.
interest rates. as before explained the ‘big four’ banks have ‘off sheet’ balances of over AU$1.5 trillion, (read that somewhere, i hope its true:-) , meaning that that figure is what overseas lenders have given us for investment in real estate purchases etc. the banks have no real responsibility over that money of which 20% goes into commercial and 80% into resi. real estate.
now the question arises about prices of real estate. why do we have to have ‘growth’? higher prices means more stamp duty for the various state governments who very prudently of course spend it willy nilly. our state government; west oz., is already AU$38bn in debit and rising. our illustrious federal ‘government'(relying on you and me to save them if things get nasty) is over AU$500bn in debit. talk about confidence building:-) and we are alluding to lower interest rates. where are you john(elliot)? you know what he would say..if you don’t know he would say ‘pig’s arse’.
jonno, you mentioned ‘uber’. i read only yesterday, from a very reliable source of course, how the head honcho of ‘uber’ has gone crackers and behaving a like an errant shoolgirl. in consequence the whole uber shebang is headed for you know where. this outfit is run by super tech. noodles who believe in one thing: profit and only profit. but they have stood on too many toes. and its crumbling. i must read the article again to be sure 🙂
now the gist of all this is, like kiwial has written(where have you been buddy?) its a scary proposition to make forecasts about anything, there is just too much happening in this dicey decade. things can happen in a nano second today. don’t put too much trust in possible future trends. it just won’t happen that way. the official figure for unemployment in oz today is 5.8% (according to abs : interpret all bull sh&t). but a private body of good repute says 9.8% unemployed and 10.2 % working one hour a week, classified as ‘working’. that is wonderful! so 80% are really ‘working’; and of that 80% nearly 40% are government employed and you know what that means! so that leaves 48% of the ‘workforce’ are supporting the rest of australia. hooray! we are on clover. no worries mate!. its all good.
your site here is called no b.s, friday jonno,. lucky its only wednesday or i would really dip my pen in vitriolic ink. still its a good forum and i do really appreciate the opportunity to write some rubbish.
interest rates, hmm.. what is a tsunami? duck for cover folks.
cheers, from ron in west oz.
oh i forgot about prices. 2001 mar 17th in the ‘west’ median price in perth AU$125,000.
2008 july in the ‘west’ median price in perth AU$465,000.
and according to the pundits its all about china and the mining boom. well the boom has gone as you
know 🙂 but the memory lingers on. and it might be a fading memory because the mines are still producing but the men are missing. the men who were getting 3-4000 bucks a week.. engineers in perth are walking the streets in their hundreds staking out uber cabs for a living. good luck with that one! electricity, gas and water costs going through the roof. but not to worry, the printers will just hot up the printing presses and el presto more money for us! oh joono the fairies are here again. down in the back garden. and they get high on some ‘stuff’ and the imagination runs wild. and the investors are out in force coz everything is just wonderful in oz.
Ben Everingham says
Im looking forward to the other 9 points Jon. I just finished Phil Andersons book the secret life of real estate and banking. Phil also agrees that there is at least 7 years left in the current cycle based on 250+ years of US land price data.
ron goddard says
hi jonno,
second try.the first one must have got hijacked. i like what you write but i don’t like what you and many, many people in oz are doing. sacrificing integrity for greed. because of the unmitigated rush into property for self making ‘milionaireship'(ego tripping) it is beyond belief that many young australians have to create false investments to get their foot in the door so to speak to own or nearly own a roof over their heads, and spend the better part of their lives slaving for it in the false belief that they are ‘getting ahead’.
in days gone by slavery was non productive, so the powers that be brought in modern slavery : nose to the grindstone, paying a mortgage, travel to work each day, which brings in much more moolah than the old way. life should be a wonderful experience for everyone, not just a few. the market? phil anderson may be right, but would he put his balls on the anvil? not likely. so we have a situation where it doesn’t need to be. rising prices are an illusion. they benefit no one but governments in increased stamp duties and banks who lend more money via off balance sheet borrowings totalling now AU$1.5 trillion. (from overseas investors)
interest rates? in the lap of the gods, but be warned if they do rise it will be rapid and out of control.
the cause of the last depression(oh what a surprise they said then) was the almost complete withdrawal of credit. can you imagine the problem if this is repeated? credit cards of no value? house mortgages almost unpayable. who gets to handle all of this? why the legal experts. and they will dole out the properties like rice bubbles to their friends and make a bloody fortune. great stuff. and it will happen. the ability to hold property for long periods is the way to fortune. and buying stocks at rock bottom prices so that when recovery comes bilionaires will come of age again. i read this somewhere so it must be true:-)
kiwial has returned for his bit and he is right jonno. anyway enjoy your life and think of the poor people 🙂 every action has an equal and opposite reaction, so take that anyway like. by the way, have you noticed how the word ‘who’ has been replaced by the word ‘that’? it is a world wide phenonemum. its funny how idioms catch on. which proves one thing. there is a universal consciousness. does active consciousness create energy? are the torsion waves still racing at luminar speeds through the universe? can your dna be altered by sound? these are the questions of today. ask the russians. they are 12 years ahead of the americanos. a perth lady recently returned from moscow fully cured of an ailment that the eminent medicos of oz said was incurable. go home and die they said. but madam x saved up AU$90,000 with her devoted husband and tripped off to moscow on a wing and a prayer. a few weeks later they returned ..beaming and happy. she was strutting like a five year old. the A.M.A.? oh that was a fluke they said..couldn’t happen. no it was all a mirage. but you tell madam x this article was in the ‘west’ a few weeks ago so i guess it actually happened.. funny world. cheers, ron from west oz.
Ken says
Hi Jon, I think more 10 years than 7 years. Dad always said “if you don’t know the past, you’ll never know the future.” I’ve always known this to be true. The market has been down for far too long and I, for one, don’t want to miss out on the big boom that has got to be looming.
Ben Hurn says
Interesting, John. I’m still a novice, but it’s a new world with new rules and I would not be suprised at a new normal. Definitely keen to hear the other 9 reasons. Would also be interested in your take on bitcoin/crypto currencies and the new way money will work in the future.
Leo says
I don’t know about all this stuff in the conversation. But, I reckon you can tell trends by confidence. Who’s got any confidence in the PIIGS yet. Not me. The EU putting on a brave face with Brexit, they don’t really want to lose the Brits. The Brits having no remorse about Brexit decision. They don’t want to be feeding the PIIGS, throwing good money away there. How long do you think Germany can keep putting their hands in their pockets. Greece is still struggling to meet it’s austerity commitments. How long before they come good. I think my guess is as good as yours…. No change for 7 to 10 years.
Sorry for using ‘old news’ as my guide. But, no new news is happening. Well done Jon.