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This Sydney graph contains never before seen analysis of the Sydney market, and is regularly updated, revealing information not reported in the Press or the Media, and contains highly valuable and rarely found information, not available to our knowledge anywhere else.
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Many believe that the 18-year property cycle is the most powerful concept you can know about as a property investor.
Because once you understand the property cycle, you’ll know:
That there’s a reason why property prices always go up in the long run – giving you more confidence that they will continue to do so.
That they don't go up in a nice smooth, straight line: crashes along the way are inevitable because of the way the system is set up.
That you can ignore what the newspapers say about property prices, and have a far better understanding of what’s likely to happen next by looking for certain signals in the world around you.
In short, a lot of facets of property investment that seem random or uncertain will suddenly make a lot more sense. With this knowledge you can at least avoid making the wrong move at the wrong time that would put your portfolio in jeopardy – and at most, you can make it a central pillar of your investment strategy.
THE LAST SYDNEY UPTURN BEGAN IN MAY 2009
Prices started rising as investors and home owners were tempted into the market by relatively high rental yields of 4%-5%, steady real estate prices and low interest rates.
As the theory goes, one should have looked for, and expected, a mid- cycle correction anytime between 2016- 2018. With prices correcting in July 2017, many believed the boom was over.
But this will be the mid-cycle correction.
Read more below on this.
In any event, expect even more explosive growth from 2020.
Here we analyse each stage of the historic property cycle, how it relates to Sydney houses, what drives the shift from one stage to the next, and what different types of investors are thinking and doing at each point…
As we talk about the indicators that signify each stage, you’ll probably be able to think back to the clues that were there, in retrospect, in cycles you’ve experienced in the past.
This is critical because if you don’t look for your own evidence, the media will lead you astray.
We have applied the 18 year real estate cycle theory (around 14 years up, 4 years down) to Sydney House prices.
These figures show an interesting trend:
Prices rose from 1967, BUT because inflation was so high, the Data from BIS Shrapnel actually shows the "real house price" after adjusting for inflation between 1974 and 1977 fell significantly by over 24%.
So, you could easily argue that that was the 3-4 years downturn.
THE 1978 UPTURN
The next upturn began in 1978 with prices rising by 16.3% in that year alone.
This lasted for 12 years until the downturn began in 1990.
Sydney residential property prices as recorded by BIS-Shrapnel showed that the market peaked in 1989 following the stock market crash of 1987 which was known as "Black Monday."
Global share prices fell an average of 25%, but Australia saw a 40% decline. 17 of the 18 major OECD economies experienced a recession in the early 1990s.
After the stock crash, money flooded into the "safe haven" of property by investors spooked by the crash. House prices rose overall in Sydney between June 1988 and June 1989 by a massive 83% in just two years, according to BIS Shrapnel data, with prime areas nearly doubling in value.
Readers may be shocked to know that the housing variable interest rate 1986 to 1989 was between 14%-17%.
"Price increases of 83% in 2 years at a time when interest rates hit 17%"
THE CYCLE BEGINNING 1990/91
After this exceptional property price growth, there was a property downturn until July 1991. Investors started to drift back into the market, attracted by the high and rising yields that were on offer as a result of undervalued prices.
Rental yields were 5% to 6% in 1990-1993, but many investors stayed out of the market as they did not believe the market would recover, which it always does.
These brave investors who did come in are what we can think of as the “smart money”: contrarian investors who’ve spotted the opportunity to get in at rock bottom, and are willing to take the risk of buying up assets while confidence is low and the investment case is still unproven.
According to former Reserve Bank Governor Ian Macfarlane:
"The recession started in the September quarter of 1990 and lasted until the September quarter of 1991. During the recession, GDP fell by 1.7 per cent, employment by 3.4 per cent and the unemployment rate rose to 10.8 per cent. Like all recessions, it was a period of disruption and economic distress."
— Ian Macfarlane, former Governor of the Reserve Bank of Australia, speaking in 2006.
Of course, nobody knows precisely at what point the bottom of the market has been reached. Smart investors are just willing to take an educated guess, based on the knowledge that their upside potential is greater than their downside risk.
Meanwhile, scared amateur investors are totally absent from the market – even though lower prices and lack of competition mean that it’s precisely the best time to buy.
They might even crystallize their losses by selling at the bottom of the cycle “before prices fall any further”, or be forced to sell because their portfolio was poorly structured to weather a recession.
So, if there’s pessimism all around you and the media is full of doom and gloom even though the major catastrophic events of the recession seem to be over, the recovery phase might just be getting underway.
As the recovery phase develops, more buyers will have the confidence to enter the market – having the effect of pushing prices gradually upwards.
Following this recession, Australia experienced a record period of economic growth.
ALWAYS BE AWARE OF THE MID CYCLE CORRECTION:
In the middle of the 14 year upturn, there is often a “dead cat bounce” or mid cycle dip. Many investors will listen to the media, friends and family, and believe the upturn is over. In fact, this mid cycle dip will signify that the biggest gains are just about to occur leading into the second half of the upturn.
The hard part is identifying it is in fact the mid cycle dip, and having the courage and knowledge to enter the market when that window of opportunity presents itself.
Then, when the crash hits (so the theory goes) house prices will usually take 4 to 5 years to recover, to reach what they were before. Then there follows a period of steady house price growth for another 6 to 7 years, followed by a correction for a year or two known as the mid cycle correction as explained above.
. And then suddenly house prices start booming, rapidly increasing for several years as you enter bubble territory.
And then the next crash hits making a total of between 12 to 15 years upturn. Then we start all over again. The total time frame of the cycle including the downturn, averages throughout all history at just over 18 years.
Here’s what it looks like in a graph:
The upturn that started in 1990/91 then lasted until December 2003.
The graph clearly shows the exact month the upturn ended!
Entirely predictable by those with this knowledge.
Followed by a 5 years downturn until April 2009. MANY PEOPLE PUT OFF BUYING during those years, with many believing "prices will never rise again as they are too high!"
THE SYDNEY UPTURN BEGAN AGAIN IN MAY 2009
Prices started rising as investors and home owners were tempted back into the market by the lowest interest rates since the 1950’s:
One should have looked for, and expected a mid-cycle correction anytime 2016-2018. So, when prices did start correcting in July 2017, many believed the boom was over. But, after the panic ends, prices could easily start to rise again in the second half of the cycle.
If so, this cycle and upturn should end sometime between 2023 and 2024.
In any event, expect even more explosive growth from 2020.
Investors and home buyers should not overlook the nature of Sydney real estate, with many times of explosive growth over a short 2 year period:
1973 and 1974: +35%
1979 and 1980: +54%
1988 and 1989: +83%
1997 and 1998: +22%
2002 and 2003:+38%
2013 and 2014: +38%
UPDATE FEBRUARY 2020
For this chart, we have also placed in the long term TREND LINE.This seems to also indicate that Sydney will perform above the trend line for the next couple of years, again seeming to indicated the decline to occur 2023-2024.
For this chart below, we have also placed in the long term TREND LINE but over a shorter time frame, which is perhaps even more appropriate given the modern times:
Melbourne seems to be on a COMPLETELY DIFFERENT CYCLE than Sydney!
What does one of Australia’s most respected economists think is happening?
Shane Oliver, chief economist and head of investment strategy and economics at AMP Capital, said the past 18 months of steep declines in the New South Wales and Victorian capitals “aren’t the end of the world”.
“I’m loathe to even call it a property crash,” Dr Oliver said.
See Dr Oliver's graph here for Sydney and Melbourne, with his predictions when the market will turn.
It bears uncanny resemblance to our charts above, although based on different analysis.
Click to read, from Phillip J Anderson on infrastructure, social unrest and property prices.
15 April 2019