How property cycles moves the different assets classes and investors in an economy – Australia Case Study.

Phil Anderson says that if we understand the 18-year property cycle from various angles we will be able to see the structure of the economy repeating and will understand and see what is happening better/clearer. The events may vary but the underlining structure based on the speculation of rent remains.

Your Playbook for the Australia Real Estate Cycle What does all this mean for asset prices?

Here’s a road map for different asset classes and the economy for the next decade. We can see the interplay of property – stocks –commodities bond markets.

This playbook can also be applied to Malaysia once you understand the fundamental of the 18-year property cycle and know where we are now in the 18-year property cycle. Click here to learn more.

Property: as we all know real estate is what drives the 18-year cycle — the gradual recovery from the previous crash eventually leads to excessive speculation fuelled by careless lending, which in turn leads to another crash. Some might argue that the predictability of this cycle of boom and bust and our failure to learn from it is depressing.

But for investors, who understand the 18-year property cycle, they can profit from it. Currently in the Australia property cycle, the outlook is very bright for property.

By 2018, we expect the market to be humming along well, with the woes of 2008 financial crisis firmly behind us.

But for Australia especially, we must be on alert for the year 2019.(mid cycle crisis)

By 2024, we’ll have hit the ‘winner’s curse’ phase, which is when early investors should be ready to get out of the market — it’s certainly not the time to take on lots of debt to buy a property.

Then in 2025/26, we’ll see a peak in the property market — the latest ‘tallest building in the world’ might well open that year — followed by a significant crash.

Stocks: stock market movements coincide with phases of the cycle. With US and UK markets near or at all-time highs so early in the cycle, we can expect the eventual peak to be very high indeed. Technology stocks will lead the way. So the long-term outlook is good. Along the way, tightening monetary policy, problems in emerging markets, and the mid cycle slowdown may lead to corrections.

So in 2015, we may see markets hit a temporary peak, but we’d expect a low to be made at some point in 2016.

Later on, around 2019, we’d expect a mid-cycle economic recession to result in a stock market correction too.

Finally, in 2025/26, the stock market will hit its final peak for this cycle ahead of the peak in the economy.

Commodities: as we’ve already seen in recent years, higher prices for commodities lead to increased production, which tends to push prices lower. However, expect the general long term trend of commodity prices to be higher into the mid-to late 2020s, with prices doing especially well during the 2017-2021 period (when growth is likely to be particularly strong).

Bonds: the outlook for bonds is weak. As the economy returns to normal, central banks will no longer be suppressing the yield curve to the same extent. As a result, we can expect yields to rise and bond prices to fall (yields and prices move inverse to one another). We’re also coming to the end of a very long-term bull market in bonds, so we’d expect the long-term trend for prices to be down from here.

As a market, bonds are well worth monitoring the shape of the yield curve is a very good indicator of trouble ahead for an economy. We’d keep an eye out for long-term bond yields falling below short-term ones (an inverted yield curve) prior to the mid-cycle slowdown in 2018/19.

We’d also expect the yield curve to invert again in around 2024/25 — before the next peak. At that point we’d expect developed world bond prices to rise again as a ‘flight to quality’ takes place. The economy: economies in the west — especially the US, Germany and the UK — are well on the road to recovery.

Growth tends to be slow at this point in the cycle. But as bank lending recovers and monetary policy normalises, economies should return to normal growth and employment levels. We can expect to see a mid-cycle slowdown or even a recession around 2020/19, but this will just interrupt the expansion rather than bring it to a crashing halt. That won’t happen until 2026/27, when we face the cyclical peak and a major slowdown.

Just as the 18-year property cycle can tell you the market in Australia; it can do the same in Malaysia once you know where we are in the cycle. To know where we are in the property cycle now click here to learn more.

Source: MoneyWeek