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Learning about property cycles


I promised a couple nights ago to write about property cycles. Since then, there’s been a lot of development with my research, aided by one of my fans (hi David!) providing some information about the property prices in Australia vs the 18 year property cycle I was talking about. I looked further into this 18 year cycle and found that it was first explored by Fred Foldvary in The American Journal of Economics and Sociology in 1997:

The 18-year cycle in the US and similar cycles in other countries gives the geo-Austrian cycle theory predictive power: the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.

It’s also called the Georgist-Austrian 18 year cycle, and seems to quite accurately predict a a business cycle that also affects the property market. Considering that in 1997 he accurately predicted that there would be a crash in 2008 (which turned out to be the GFC) based on his understanding of this cycle, then it seems to have merit, and is recognised as such by some very smart and wealthy people around the world. But of course there’s those that ‘scoff’ at it as well.

In 2008, Fred wrote:

Some economists have scoffed at the real estate cycle, saying that “real estate is local.” Sure, there are wide local differences, but real estate is bought and constructed with borrowed money, so the financial aspect makes real estate national and global, and there are also economy-wide general trends.

What I’ve been seeing is that there’s this overlying global and national 18 year cycle (14 years growth followed by 4 years decline) that also includes separate, local 7-10 year cycles. By ‘local’ I mean that the 7-10 year cycle of Brisbane is going to be different to the 7-10 year cycle of Canberra, which is different to the 18 year cycle of the country which is certainly affected by the business cycles in the US and currently in China.

By understanding the various cycles and what’s going on in them, you can quite accurately see where your local area is at within the cycle, and you can see where the country and the world is at.

If we look at 2008 as the beginning of the decline phase, then 2012 saw the beginning of the growth phase. If we look at the state of the world (or at least at the US) and of Australia, we can see this is absolutely true. So we’ve got a general growth period of 14 years through to 2026 (only 11 years from now) before some other major economic event occurs to cause a decline/crash.

But here in Australia, by also considering the local 7-10 year cycles, we can get even a more accurate picture of what’s going on, and where we’re at within the cycle, based on our local area.

There’s 4 recognised stages of the property cycle, and the below will provide a bit of information about the various sub-stages of the cycles and what happens within them. When you look at what’s happening around you and in the media, you can tell which stage of the cycle your local area is in.

(With thanks to the McCarthy Investment Group for the below information that I’ve learned.)

Phase 1 – The Slowdown

1. slowdown

Phase 2 – The Slump

2. slump

Phase 3 – The Recovery

3. recovery

Phase 4 – The Boom

4. boom


My analysis

I’ve done some analysis of the markets around the country at the moment, and this is what I’ve found for the past 12 months for 2 bedroom units (averages):

Sydney Melbourne Brisbane Perth Adelaide Canberra Hobart Darwin
Annual Growth 8.7% 2.2% 2.9% 1.5% -1.2% -1.6% 1.3%
Median Price $933,000 $525,000 $548,000 $538,000 $389,000 $420,000 $520,000
Median Rent/wk $850 $530 $620 $550 $430 $550 $395 $620
Rental Yield 4.7% 5.3% 5.9% 5.3% 5.8% 6.8% 6.2%
Rental Demand/Unit 171 177 198 186 297 60 629 190
Estimated cashflow/mth -35 206 504 240 314 709 614
For sale 46 436 121 123 174 31 2 96
Sold 1013 2058 1192 857 917 109 73 287
For rent 84 209 105 129 85 17 11 56

In the context of my interest here in Canberra, what this shows is that 2 bedroom units and apartments in Canberra are in a depreciating market, but rental yields and investment cashflow are quite high, with a low number of properties available for rent.

If we look at the various stages of the property cycle above, and with the knowledge of the Canberra market that I have, I believe Canberra is in the Recovery stage, because:

  • We have high rentals with a shortage of properties
  • Developers beginning new residential developments
  • Building material and construction costs have increased (I learned over the weekend)
  • The market has tightened with reduced choices for buyers
  • There’s an increase in house auctions
  • Discounting is reduced or non-existent
  • It’s a seller’s market

As a result I believe that now’s a good time to buy in Canberra because we’re in the later stages of the Recovery phase. Buying off the plan right now will result in apartments completing development within the next year or two, right into the Boom phase where their value will appreciate.

I think that in 2017 we’ll start to move into the Slowdown phase, and 2018 will be a good time to sell if you want to get rid of property before the Slump phase begins around 2020.

In other parts of Australia, like Sydney and Melbourne, they’re already in the Boom phase, so in a year or so they’ll be in the Slowdown phase, and then by 2018 they’ll enter the Slump phase. Canberra is about a year behind them.

In terms of the 18 year cycle, the national property cycle (Sydney/Melbourne) fits right into the overlying 18 year cycle:

  • ~2014 – 2016: Boom
  • ~2016 – 2018: Slowdown
  • ~2018 – 2020: Slump
  • ~2020 – 2022: Recovery
  • ~2022 – 2024: Boom
  • ~2024: Slowdown – new financial crisis – Slump/Crash

I’m finding the entire learning experience absolutely fascinating! So much that I never knew.

Thanks for reading! Please add your own thoughts below.

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