Can we draw on the past to predict the future?

Some have pushed this out as far as 10 years but 'the cycle' is quite often portrayed as being something pretty much pre-ordained as if set in concrete.

A thinking person might question this and for good reason. He might even be more than a little confused, especially in recent times, again for good reason.

Yes, the Australian property market has experienced cycles, some of which were reasonably predictable. They varied in timing and duration from one part of Australia to another, from one State to another, indeed in different parts of the same city, influenced by both macro economic & localised events.

One cannot look at Australia as a whole at the same point in time, as, aside from macro economic factors, there will always be other local factors that influence the market.

In this discussion we're going to be looking at the big picture rather than local factors such as a new freeway or construction of a railroad, mine or new power station which may influence a market. We'll explore changes to macro economic policy over relatively recent history both here and overseas, and their effects on our economic (and thus property) cycles.

By exploring these we'll see if it's possible to predict the future.

It's worth saying right here at the outset that smart property investors should be seeking out a quality property in a good area at the right stage of the cycle.

Yes, the usual indicators of where we are in the property cycle do still apply to a large extent. Things such as easier & cheaper money heralding a recovery especially, but it's just not that simple anymore in our globalised world.

A Question?

What has the extremely high crime rate in the Mexican border town of Ciudad Juarez, or the loss of prime Argentinean beef growing country to growing Soya beans got to do with Australian property cycles?  What about the fact that in the worlds largest communist country, China, the state does not care for you when you retire or if you get sick or even injured at work yet in one of the world's oldest bastions of capitalism, namely the United Kingdom, retiree's receive a pension & the sick and injured are cared for by the State via the National health scheme?

You may well ask and I will endeavour to explain a little later. Suffice to say that they are anomalies in our increasingly globalised world economy, the distorting effect of which on investment cycles may not be immediately apparent, but they do have an effect as you will see. 

But first some pertinent history and a ‘not so pertinent’ short story.

A short story:

My earliest recollections of Australian property cycles go back to 1961 when we were in the grip of a credit squeeze. My father, always a bit of a joker, had cut out some small pictures of cheques from a Bank of NSW (now Westpac) brochure and, at his urging, I presented them over the counter to a teller for cashing, explaining that they were small  "due to the credit squeeze". I was only a young lad at the time so didn't fully understand what it was all about. I did become interested in Economics though.

Yes, it was a joke and the teller dutifully laughed, patted me on the head (there were no security screens back then) & proceeded to deal with my father.

Thinking about that now I wonder if that teller knew what I was talking about as even today, with our constant bombardment in the press, TV and internet of financial news, share indices & the like I doubt that most bank tellers would understand the dynamics of our economy, something that is becoming increasingly more difficult, particularly since the GFC in 2008.

None of the so called 'experts' predicted the GFC so you could hardly criticize  most bank tellers for not being up to speed on these things.

Some History:

That 'credit squeeze' in 1961 was brought on by our Government's deliberate policies to slow down more than a decade of post WW2 growth.

Our property cycles were fairly predictable then and remained so for the next 40+ years. They had been largely determined by our Government's fiscal & monetary policies. Our manufacturing industries operated behind barriers of tariffs and a fixed exchange rate for our currency until the Hawke Government started to open things up after 1983.

Until then we as a nation controlled our destiny to a large extent. But, things were changing.

To our north, at this same time, China was waking from an economic slumber induced by the strict communist policies of Mao Tse-tung, by introducing 'Capitalist' style reforms that would see it emerge as the economic power house it is today.

Changes instigated by the Hawke Keating Government such as floating our currency and the gradual breaking down of trade barriers made massive structural changes to our Australian economy and were instrumental in taking away some of the control that our Government had over the dynamics of it.

Little wonder then after the boom of the 80’s that we went into recession in the early 90's whilst our economy adjusted to these massive changes which, among other things, resulted in substantial unemployment.

Things were pretty flat around the country, including property, until the final year of that decade (the 90's) when markets again loosened up & property prices began to climb. But these changes were some of the more obvious ones.  Less obvious to us were changes happening overseas at that very same time in our increasingly globalised world that would eventually stoke the flames of a property boom both here and overseas.

And boy, were we hanging out for that by the time it came around at the beginning of the 'noughties', having been through 7 to 8 years of depressed to flat conditions.

I recall buying numerous properties in 2001 from vendor's who had paid more for them between 1993 & '96. Had those vendors, investors for the most part, studied the property cycles or understood them they would not have bought when they did.

Let's just for a minute step back again to the late 80's & early 90's though, because drawing on history  with our knowledge of what has happened since helps us to understand why things happened as they did. Maybe they can even help us predict the future?

About the same time as Paul Keating famously remarked that our economy was akin to a 'Banana Republic' and that we were having the 'recession that we had to have'  the member countries of the European Economic Community (EEC) were deciding to broaden their relationship with each other &  form a monetary union (the Maastricht Treaty) which would ultimately spawn a single currency, the Euro, by the end of that decade (in 1999). In Germany, 1989 saw the Berlin wall come crashing down uniting the two halves of that powerful country & Gorbachev was ushering 'perestroika' into Russia.

Meanwhile, in the UK, the 'Iron Lady', Margaret Thatcher's reign had just come to an end (not her conservative party however) but not before ushering in sweeping changes to British life.  Her political philosophy and economic policies emphasised deregulation especially of the financial & banking sector that saw London become the world centre for banking and insurance, flexible labour markets, the privatisation of state-owned companies, and reducing the power and influence of trade unions.

Those policies were labelled 'economic rationalism' there & here and greatly influenced our government's policy at the time leading to de-regulation in many area's including banking & floating the A$. The Commonwealth Bank was sold off around this time as was Qantas.

Australia & the UK were not the only countries to embrace such policies. New Zealand was making quite radical changes as was the USA, both significant trading partners of ours.

One such change in the USA that has had a massive effect on our economy, a change that may not have been easy to foresee at that time, was the abolition of the Glass - Steagall Act in 1999 by Bill Clinton.

Originally passed in 1933 straight after the Great Depression this act limited affiliation between commercial banks & investment banks or securities dealers. Around this time (and since) there were several large mergers of such firms to form the mega banking behemoths that we know today, considered "too big to fail" by our governments and the practices of which many commentators see as an important ingredient in the causes of the 2008 GFC.

What has been the result?

So what has all this got to do with Australian property cycles you ask?

A lot I contend. In a word it's globalisation.

In my next follow up article to this we will explore the effects of the policy changes we've chronicled here on the Australian property market. Further, by exploring the resultant effects of those changes we'll see if they enable us to predict the future.

About Adrian Stagg
Adrian 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.