opinion

Can we draw on the past to predict the future - Part 3

By Adrian Stagg
0

adrian tnIn the last part of this article we saw clearly how rising markets are fuelled by cheap, easy credit among other things.

Blogger: Adrian Stagg, Embark Intelligent Property Investment

We also looked at how events overseas have an effect on our property cycle here and how globalisation has added to, and sped up this process and how structural differences, even those occurring in far away places, can distort the effects.

In this final part of the article we'll explore these further & we'll see if it's possible to predict the future. As they say 'History repeats itself', so if that's true then fore warned is fore armed. The smart property investor will be better placed on when to buy in to property investment. Buying in at the right time of the cycle can reap high returns over a shorter time span. 'Timing is everything' - another well worn but very true phrase.

So, where to from here?

If we count the collapse of Lehman Brothers as the beginning of the GFC then almost 5 years have passed of that oft quoted 7 year cycle.

Personally I contend that the GFC commenced some 8 months or so earlier and for the record do not necessarily subscribe to the 7 year cycle theory either.

Having said that, cycles there have been and cycles there will continue to be.

I feel quite certain that if one could step 50 years into the future & look back history will record numerous of them. And, curiously there are presently many indicators suggesting we are in the early stages of a recovery / upswing right now. Could that 7 years have some truth after all?

The more pertinent questions are when and how will these cycles affect investing in property?
Obviously the best time to buy an investment property is at the beginning of an upswing.

So, what are these signs that are now signalling an upswing?  

•    Employment: Despite structural changes that have led to much publicized staff lay offs we have low unemployment, particularly when compared to other developed economies such as the US. Our economy is the envy of most countries in the developed world.

•    Share Market: Share prices are rising, recently breaking through the 5000 mark on the ASE.

•    Rents: Residential rents have risen in some markets and supply is tight.

•    Cost of money: Interest rates are down and likely to go further, so money is cheaper.

There is a question about the supply of money however. There's also one about demand. On the supply side whilst money is freely available, relatively speaking, some people, of which I am one, are questioning the introduction of the NCCP Act which is recent Commonwealth legislation that is designed to protect consumers and ensure there are ethical and professional standards in the finance industry.

This legislation has already curtailed the activities of many a smart investor who was willing and able to invest and accept risk yet was deemed under the legislation to be incapable of doing so.

A clear molly coddling 'one size fits all' piece of Federal Government legislation that I for one do not agree with.

Is this some extension of monetary policy in disguise? One sometimes wonders but it's certainly not helping things from where I stand.

On the demand side there is still the question of confidence in the marketplace and it's a big one.

Most mum's and dad's and first home buyers are not convinced and are still keeping their hands in their pockets though change is afoot as keen market observers will attest. Keep an eye open for the stats showing changes in home loan volumes (another economic cycle indicator) as proof of that. Those stats will , I expect, show that most of the change relates to early adopter investors. Confidence or lack thereof in the broader group is such that these people's belief is shot however.

Most will wait until they are the last man on an overly crowded bus just before it crashes. Haven't we all seen this before? As I said previously; 'History repeats itself'.

"C'est la vie" as the French would say.

The more intelligent, thinking property investor is going to be looking at the signs, indicators in the economic cycle, some of which we've outlined above. They would suggest that we are around "7" on the property clock, ie  in the early, hesitant and uneven stages of a recovery. Look for firming commodity prices and rising overseas reserves as indicators of this trend strengthening.

Global Change Factors: As we've seen & discussed, in this increasingly globalised world we are more prone to what's happening in other parts of the world these days. Some of the sorts of things that could change the ball game for better or worse are as follows.

Europe: A unified Europe is still just an idea. Despite it having a common currency, it's a continent made up of states with diverse cultures & interests, different tax rates, foreign and defence policies; nations just co-operating as they see fit for the time being.
Countries such as England Greece and Holland are seeing the rise of right wing political parties who want to break away from the Euro or even the EC. It's not broken but the EC certainly ain't 'fixed' yet. National & cultural differences do matter and are at the root of the malaise in fixing the structural differences and imbalances that exist in the EC's design. How successfully these are resolved will effect the global economic cycle and hence Australia's.

International Currency: with some currencies fixed and others floating there's plenty of room for inequities and imbalances in the global financial system. The Chinese Yuan in particular, which is fixed (though slowly appreciating under close Gov't control), is widely acknowledged as being under valued causing major trade imbalances, especially with USA, hence that country's quantitative easing policy. The Japanese have also started to adopt this policy over the past 6 months or so. This has the effect of devaluing the currency making imports dearer & imports cheaper and hence can have a major impact on the volume, direction & fairness of international trade.

The Japanese Yen has depreciated by 25% against the Aussie dollar (AUD) since last September, something not widely known or reported, the focus being more on the USD, though Japan is one of our major trading partners. Now that the reserve bank seems to have inflation under control look for a lowering of interest rates over coming months as a tool to make buying AUD's less attractive, thereby lowering it's value.

Interest Rates: In fact, in my view, in this globalised world we are now a part of I think Australian interest rates will come to more closely reflect those of our major trading partners + a margin to reflect our resource based economy. Official Rates in Europe, USA & Japan range from near zero to around 2.5% so look for ours to go lower.

Bear in mind that also effects depositors as well, particularly retiree's with their money invested in cash deposits. A drop in interest rates means that they will need to have a substantially larger capital sum invested to get the same return, or look for something with a higher yield. The common yardstick of using 5% as a measure of return for retiree's and hence their retirement lump sum required is, in my view, outdated.

International Trade: International trade has flourished under the WTO which came into being in 1995 but there are some worrying signs out there. During last years US presidential elections the issues of US jobs being outsourced to China and the country's future being mortgaged to China were raised repeatedly by candidates blaming the administration. It appears to be withdrawing to some extent from the world stage and is more reluctant to be the world's policeman. It has massive reserves of shale oil deposits and CSG which have the potential to enable it to be much more self sufficient for it's energy needs. Currency wars are the order of the day now - beware of tough protectionist measures being re-introduced.

Multinational Financial agreement: Unlike the WTO there is no complete formal mechanism in place (as yet) to regulate international financing and banking standards, though the G20 have been chipping away this issue since the GFC, with mixed results. This is a very complex area influenced by big vested interests, both private & national so will not happen quickly, if at all. Maybe another GFC is what's needed to achieve agreement? Success with this will bring much more certainty to investment.

Conclusion

So, in conclusion, yes, cycles will continue and there will be the usual indicator signs of where we are in the cycle, but, as Australia is now much more firmly entrenched in the global economy outside influences will play a bigger role in what happens here. Our Government will have less and less control under the status quo.


About Adrian Stagg
adrianAdrian Stagg is a director of Embark Intelligent Property Investment (www.embarkpropertyinvestment.com.au) & has been actively involved in the property industry since the 1970’s. His first foray at an unusually young age was as an investor.

Since then he has worn the hats of Real Estate Agent, Renovator, Builder, and Property Developer and of course, home owner. Through all these years, he has witnessed several cycles in property markets and now guides clients looking for ‘an edge’ in their journey through  property investment strategies and runs property investment seminars. Check out his blog where he shares his insights on smart property investment and how to get through the property maze.

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