Making Sense of The Market

September 11, 2014
Alan Heath

A close to certain trend is repeating itself in the housing market right now – it’s not just opinion, the numbers speak for themselves.


When rates fall, house price rises, and this only stops when rates come back up.


I am happy to say that I am old enough to remember first hand the last major correction to financial markets in 1987 that involved failure of some Australian banks. It took 10 years for Australia to recover. We had another major correction in 2007 – this time due to failure of some World banks.


Following the 1987 correction, I had friends during the 1990’s who said that they didn’t want to invest in property because it “never went up”. That view was understandable, because if they had been in property for five years and it had “never gone up” – that was their experience. To their regret – many of those friends lacked patience and sold prior to 1999. To illustrate, see Graph 1 (Interest rate vs Sydney House Price)


Look carefully at the period from mid 2000 to mid 2002 when a dramatic fall in rates triggered a dramatic rise in Median House Price. It took several rate rises to stop this upward trend! (with rates peaking in late 2007.) Another dramatic fall in rates during 2008 triggered a small increase in price, which was curbed by modest rate rises from 2009 to 2011. Since 2012 rates have fallen and stayed low.


The aforementioned 1987 market correction (for patient investors) eventually ended with a prolonged, dramatic price increase period for three years (2001 to 2004). The 2007 market correction is now ending in exactly the same way.


No matter what “talk” the Reserve Bank comes up with – rates are being held low for “the foreseeable future”. “The most prudent course is a period of stability in interest rates” – because the economy needs it.  Irrespective of what the Reserve Bank “says” in trying to talk the market down – house price will rise. This is as close to certain as anything can be. (The Australian, Wed 3rd Sep)


And another thing … When house price cycles end, they end with a plateau not a drop. If you are waiting for prices to fall before you buy then I hope you can hold your breath for a very very very long time. That’s my way of saying that I don’t believe that will happen – you will simply have missed this cycle. (There will be another one – you will just have missed this one)


Take a look at the next graph (Graph 2) which plots the relationship between Sydney and Brisbane Median House Prices.


There is a clear link – Sydney eventually pulls Brisbane along with it. In demographic terms, there comes a point when Brisbane property looks so appealing that people move states – or buy that holiday home or investment property (with the weather and the lifestyle why wouldn’t you!)


When the GFC came I said that you’d need to be patient and be prepared for a 10-year cycle (and remember the Brisbane property market had the floods of Jan 2011 thrown in)


I agree with John McGrath “If you had $1m to invest, there is nowhere but South-East Queensland to be over the next three years” (Sydney real estate agent, The Australian, Mon 8th Sep, Page 2)–.  If you’ve had property in Sydney these last two years then you are reaping the benefit and have at least a year of this cycle to run.

Look at the graphs – buy now in Brisbane and enjoy the ride.

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