Why do economic cycles and property cycles occur? WHy can’t the market find a happy equilibrium?
The first thing to understand is that…
This disposition tends in itself to produce the effect which it looks forward to, a rise of price: and if the rise is considerable and progressive, other speculators are attracted, who, so long as the price has not begun to fall, are willing to believe that it will continue rising.
These, by further purchases, produce a further advance: and thus a rise of price for which there were originally some rational grounds, is often heightened by merely speculative purchases, until it greatly exceeds what the original grounds will justify.
After a time this begins to be perceived; the price ceases to rise, and the holders, thinking it time to realize their gains, are anxious to sell. Then the price begins to decline: the holders rush into the market to avoid a still greater loss, and, few being willing to buy in a falling market, the price falls much more suddenly than it rose.”
Property markets have corrected through 2011 and early 2012
Through 2011 and early 2012 we have seen a level of correction in most property markets, as anxious owners were keen to realise their gains, and new buyers became unwilling to enter the market at the peak of the cycle.
Residential property market corrections often react differently to share market downturns, as a high proportion of dwellings are held by owner-occupiers rather than solely investors (which is in stark contrast to the dynamic of equity markets). As noted in a previous post, George Soros observed that only “once in a blue moon” does a short circuit in leveraged markets trigger a genuine free-fall.
The good news for property owners is that falls to date have been both moderate and monotonous, and further they seem to have stabilised over a period of several months. In many areas moderate growth has even returned.
While excitable journalists and vested interests reported this week that property prices “could fall by as much as 12% to 15% over the next two years” we simply need to be aware that property is a long-term game with an unpredictable near-term outlook.
The long-term view is important
We need to view all market corrections in a wider context. The Dow Jones, by way of an example, has roared back up to near all-time highs at 13,500 points in only a few short years after the global financial crisis.
In the 1987 example above we have doubled one to get two, and then we have halved two to make one. It is very simple mathematics, so it should be a correspondingly simple paradigm shift to change your mind-set from a short-term to a long-term horizon. Instead of worrying about the next six months or year, try to visualise where the market will be 20 or 30 years from now.
The property markets need a shot of confidence
While it seems logical that property prices should rise no faster than household incomes, what instead tends to happen is that prices stagnate or drift lower for a period of time, before appreciating sharply. Markets are not rational, and they never have been because they are affected by human emotions…and humans are not rational beings.
What property markets will need for strong capital growth to return is an injection of confidence. This may take some time to come, but we know that markets are cyclical and come it will. Interest rates look likely to fall yet further at this juncture, and in turn the currency is likely to weaken somewhat too.
These twin forces will gradually lure investors back into the market, first from Australia and then from overseas, and growth will eventually return again. Of course, to out-perform we should always seek markets, suburbs and property types that look set to boom on a counter-cyclical basis.
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