Where are we in the property cycle? Clearly as a property investor that’s important to know.
Well…another year, yet another property market theory: this time it’s the bull trap. We’ve certainly had plenty of different hypotheses in recent years.
First there were the “prices will crash by 40-60%” predictions…but prices instead appreciated through the financial crisis.
Then, when prices eased moderately through 2011 and 2012, the new theory was that Australian property markets were in fact experiencing “a slow melt”.
Now that prices have recovered over the past 9 months or so and it looks almost inevitable that property prices will continue to increase over coming months, the slow melt theory has also been consigned to the waste-paper basket.
As mentioned previously on this blog, the predicted outcome of lower median prices in real terms might be exactly right over time, but the path there is unlikely to be a smooth one due to the herd mentality which tends to be associated with markets.
So, what comes next?
Well, the latest theory is the bull trap.
What is a bull trap?
A bull trap is a usually terminology which we associate with stock markets.
It’s a sign of the times that stock market terminology and technical analysis tools are being applied to property markets (which have very different characteristics to stock indices, not least because they are far more illiquid and because they are not pure investment markets).
A bull trap is a false signal which suggests that a declining trend in a share price (or an index) has reversed and is all set to head back up, when actually what is happening is that the price has only temporarily arrested its punishing decline.
The classic bull trap causes some investors to buy in (or buy back in) only for the stock or index to resume price declines resulting in financial loss for those who bought at the point of the false signal. We often see more than one bull trap during a stock market crash – such as the two significant bull traps experienced by the Australian stock market through 2008.
What might a bull trap look like?
Here is a chart that has been doing the rounds on the internet for some time of what a bull trap in a market bubble market might look like.
Commentators who first predicted a crash and then predicted a slow melt, are now suggesting that the current strong clearance rates and price growth being displayed by the property markets are a trap and that we are actually at Point A in the cycle.
The exact shape of the chart is not particularly important, moreover it’s the theory which is key (for one thing it is unlikely to be 100% accurate as I expect Sydney’s property prices to move on further to all-time highs in the coming months).
Technical analysis in property
Technical analysis is the practice of forecasting the direction of securities through analysing past trends in market data such as share prices and trading volumes.
The theory is that when prices and volumes fall or rise to a certain level then analysts will be able to predict that buyers or sellers will step in to the market.
In another sign of the times, commentators are now using technical analysis to forecast property price movements.
It is mainly nonsense really, for residential property is such an illiquid market and the process of buying a property takes so long that markets do not respond to price action in such a rapid manner.
Some of the weaknesses of technical analysis include that the practice thereof makes no attempt to assess shifting market conditions such as the impact of changes in tax laws, stock market releases, changes in management, sales mixes, interest rates, the prevailing cost of capital, and so on.
And besides, it is often said that if you give a technical analyst a series of random charts they begin to identify all kinds of technical signals and patterns. For all of the these reasons and more, property is a market far better assessed using fundamental analysis such as price-to-income ratios and affordability calculations than it is simply using price charts.
Trees don’t grow to the sky
It’s overtly obvious that most commentators are hopeless at picking the direction of property markets.
They have well and truly proven that over the years.
You can rest assured that market commentators will continue to predict a major property downturn every year as they have for the past decade – and one day they will at long last be right.
While investors always try to time markets as skilfully as they can, this is harder to do than we tend to imagine.
Consequently the more an investment plan is reliant upon timing the market accurately the less likely it is to be successful.
If you are going to fret and stress monthly over the direction of property prices over the next few years, you should do yourself a huge favour and put your money elsewhere. Property is an asset which should be assessed for its returns over a time horizon of decades rather than days, weeks and months.
What is inevitably the case is that we will eventually experience a downturn, and at that point – whenever it may be (‘bull markets’ tend to be irrational and can run for much longer than we might think) – investors will not be able to escape the fact that prices at that time will certainly be historically high.
A new paradigm?
One of the key indicators of any bubble is when people start to talk of “a new paradigm!” and we have certainly seen an element that over the last decade.
On the eve of the 1929 Wall Street Crash it was said that stocks appeared to be at “a new, permanently high plateau” and through the tech stock bubble market cheerleaders including Jim Cramer said that internet stocks were the only ones worth owning – the old matrices and formulas could be thrown in the bin (shortly before many of the favoured stocks lost 95% or more of their value).
What is not yet known is to what extent Australia’s higher property prices are justified by the structural shift to low inflation and lower interest rates, a huge boom in our capital cities’ populations, the proliferation of two-income households and banking deregulation…and to what extent price growth has been fuelled by homebuyer and investor exuberance.
When the downturn does eventually come, there may be nowhere to hide in the illiquid property markets, which is why I recommend only holding high-quality, established properties for which there is a massive and growing demand.
Those who have rather speculated in cheap properties in areas of low demand such as tourist towns, beach resorts, remote regional centres with low population growth or low-demographic distant outer suburbs may get burned.