The 18 Year World Real Estate Cycle
Eric Goldschein: Business Insider: Jan 10, 2012:
First, the big picture: The U.S. federal government began selling off land in the year 1800. Since then, there have been peaks and valleys of land sales and speculation roughly every 18 years.
Rewind to the first major boom-and-bust, in 1837. The stock market peaked just prior to the bust, a trend we recognize in our own era.
As a result, banks hoarded gold, silver and cash for years afterwards:
Bank lending picked back up after the 1849 gold rush, putting credit back into expansion mode:
By the 1850s, another boom-and-bust cycle had begun. It took the American Civil War to pull the economy out of its dive:
Check out the spike in interest rates in 1857, and their uncharacteristically low level in the following years:
Once again, banks hoarded their assets and rebuilt their base with gold and silver:
In 1873, another crisis (predicted once again by falling stocks prices) resulted in four long years of turmoil before hitting rock bottom. Interest rates stayed below average during that time.
And again in 1893, with little recovery seen until five years later:
Accordingly, interest rates remained low for the rest of the 1890s:
The most memorable crash came in 1929, resulting in the Great Depression. Bank lending, and the land prices that served as collateral, fell throughout the 1930s.
It wasn't until the 1950s, after World War II had ended, that the economy and the real estate cycle was able to reset. The stock market low of 1974 was the next biggest crash since that time.
The next real estate cycle was 1974 to 1992, with the second half of the cycle being buoyed by credit creation and real estate collateral:
The stock market lows of 1991 turned into all time highs in 1992, and interest rates remained low until 1994:
And the trend continues: Here is the same chart, as of September 16th, 2011. Historical repeats of note include the retracement by half of the entire up move after the bust, the strong recovery of the index once the Federal Reserve got involved and new all time highs in the Dow.
Anderson notes at the end of the report that "if markets go lower than the lows of 2009, this current cycle has further to run."
OK, THAT'S ALL WELL AND GOOD, BUT HOW DOES IT RELATE TO THE AUSTRALIAN MARKET, AND TO SYDNEY IN PARTICULAR?
WHERE ARE WE ON THIS CYCLE RIGHT NOW( 2019)?
25 February 2019:
Let's start with a big claim: 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.
So we'll get to talking about how you can use the 18-year property cycle to make better investment decisions.
WHY IS THERE A PROPERTY CYCLE?
In pretty much every market other than land the forces of supply and demand keep prices roughly in balance.
In simple terms, if you want to get a massage, but so does everyone else, it will be hard to get an appointment and prices will rise because there is more demand than supply.
Then more competition will come. And will attract new masseurs to open up, and they will have has to reduce their prices to remain competitive: the point is that supply and demand work in tandem to keep prices stable over time.
In the land market though, this can’t happen because the amount of land in existence is fixed. The old saying is true:
As a result, when the economy is growing and there’s demand for new homes, shops and factories, that extra demand will push prices up. And because there’s no supply mechanism to pull prices back down, land prices increase faster than wages and the price of goods.
It doesn’t take people long to realise what’s happening and investors see that they’ll get the best return on their money if they put it into property (as a proxy for land). At times of particularly high demand, people “speculate” by buying property on the assumption that the price will continue to go up.
Because property prices increase faster than wages do, property eventually becomes unaffordable for the majority of people. When this happens, the bust comes: property prices plummet, causing chaos for the banks (which have been lending money secured against high-priced property). The banks withdraw lending, building activity stops, and businesses shut down – which all have obvious knock-on effects for stock markets and employment levels.THE STAGES OF THE 18-YEAR PROPERTY CYCLE
The economist Fred Harrison was one of the first people to identify the existence of the property cycle. He traced it back for hundreds of years to conclude that the length of a full cycle averages out to 18 years, with each cycle divided into distinct stages:
Eventually of course, prices drop to a more sustainable level and everything gradually goes back to normal – at which point the whole cycle starts again.Importantly, each cycle starts from a higher “bottom” than the previous one – so the long-term trend is always upwards, even though there’s a lot of volatility along the way.
That, in a nutshell, is the property cycle. It would be more accurate to call it “the land cycle”.
But house prices are easier to get data on than land prices.
Chances are you'll have a memory of at least one complete property cycle – possibly more.
So, click on the link if you want to see how it relates to Sydney houses:
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