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How you can get it right when the property experts get it wrong!

Written on the 18 February 2017 by James Cagney

I have studied the research and the comments of many of  the experts and so often they get it wrong.  These experts take hold of historical data and believe that the property market is a smooth linear curve of troughs, corrections,growth and peaks. They seem to think that as property prices have started to increase the market must have gone past the trough and prices are bound to increase - wrong! To invest wisely you must have a clear understanding of property cycles, human emotions in the buying decision and what sparks the change from phase to phase within the cycles. 

In addition some of these experts believe that the residential property market is one single market place. On the contrary, the various trends and cycles must be applied to a specific region, city,  town and suburb and sometimes, even the street in which the property is located. For example, you cannot say that a city like Sydney is in the growth or correction phase because each suburb has it's own cycle. Sydney has over 100 suburbs where prices are over $1 million for a home and many suburbs are over $3 million. The first cycle you need to understand is the "Property Cycle & the Cycle of Market Emotions".

I wrote an article entitled "The best kept secret of the rich property investors" which covers this cycle in great depth. In summary There are three separate and distinctive phases in the property market i.e. The "Rapid Growth" phase, the "Correction" phase and the "Stabilisation" phase.  When you merge the "Cycle of Market Emotions" published  by the Russell Group and my model of the Property Cycles you will find a model that gives you greater insight into the workings of property investment. When you understand and apply this principle using historic data it is the "Best kept Secret:". It is so effective that I have only shared this secret for over the past twelve years with my own clients. And, now you have the secret. The article is definitely worth a read so after you have finished reading this article please click >>> BEST KEPT SECRET.

 

So whilst the property experts get it wrong - you can get it right by following the models outlined in this article. Predicting where the current market is located is easier if you follow simple principals. The Property Growth Cycle shows that you need to follow the infrastructure. This is where big business and government are investing money and this is where the jobs are being created. Increasing jobs in the area attracts workers as people prefer to live reasonably close to where they work. The Fly-in Fly-out (FIFO) workers in our last boom has caused huge problems in family relationships in the past. Therefore the Federal and  State governments have been persuading mining companies and big business to employ locals over FIFO workers. With the population growth in the area a demand for housing increases and property prices and rentals increase. Investors flock to the region for growth and higher yields. Once developers and builders get involved the number of houses increase dramatically. Heavy trucks destroy the roads requiring more workers to repair them. Construction workers pour into the area and the demand for rentals and owner occupier homes increases. This influx of people creates a dire need for more roads, schools, kindies, shopping centres and the cycle continues. The diagram alongside is how the growth cycle works.  I wrote an article on how mining, big business and government affect property prices which shows where the major infrastructure is going to be in Australia during 2017. As an investor you need to read this so click >>> INFRASTRUCTURE . 

However, developers rely on economies of scale when they build estates. They are responsible for the building of roads, water pipes, gas pipes, electricity and other utilities,  within the estate. They have to create the parks, plant trees, shrubbery and plants as determined by the councils. This is not cheap and to make a profit they need to subdivide the land into as many blocks as the council will permit.  Government is happy because it makes land affordable and councils are happy because it bring in more rates and taxes. Investors are happy as the prices within these estates continues to rise. Builders are happy because they are busy. Renters and owner occupiers are happy because they can live in a nice new home with all the required facilities close by.     "Happy Days' are here again. 

Unfortunately the thrill and euphoria is often short lived.  In my model "Phases of Employment & the Property Cycle"  you can see the different phases in the employment cycle and how it fits into the "Property Cycle & the Cycle of market Emotions". Once again it all about cycles and the experts just don't seem to 'get it'.

During the "Construction Phase" the growing employment corresponds to the 'Rapid Growth" phase the "Property Cycle" above and prices of property surge to the delight of developers, builders and investors. It is as though everybody has blinkers on and the "Excitement", "Thrill" and "Euphoria" continues abound. This is unfortunately what happened in Central Queensland. Regional towns like Gladstone, Emerald,  Mackay and Rockhampton experienced high growth in property prices. In Gladstone once each of the four  LNG plants reached completion workers were laid off. I was in Gladstone when one of the company's handed over 300 homes back to the real estate agencies. I was in a state of shock. How can this happen? As hindsight is 20 / 20 vision I now know we were heading into the "Maintenance Phase" of the Employment Cycle. Less workers are needed in the "Maintenance Phase" and renters had to leave the area to look for work. Investors then could not rent their properties out for anywhere near the weekly rent they were demanding during the "Construction Phase". Therefore the property market very quickly went into the 'Correction Phase" and property prices began to fall. Builders could no longer build for a profit and left the area. Construction workers followed suit creating further oversupply of rental properties available. Investors could no longer hold onto properties which could not be rented at a decent yield. Most then would go through each stage of the 'Cycle of market Emotions" :

"Anxiety" turned to "Denial" (This is short term - the market will improve);  turned to "Fear" (What were we going to do?); "Despondency" turns to "Panic" (What are we going to do?); "Desperation" turns to "Panic" turns to "Capitulation"  when they can't sell the property); turns to "Despondency" and "Depression" as property owners don't know what to do with the property.  Thankfully the properties in the area will get to the "Hope Phase" as good news about the future is publicized. The price of LNG gas has been increasing which means that the LNG plants will ramp up production bringing employment to the area. Once these LNG plants reach full capacity another plant will

have to be built bringing in construction workers again and so the cycle perpetuates. Once again it is about the cycles and the experts just don't get it. 

To bring the cycles together there is one more model  I want to share with you.  It is the "Cycles & Emotions" model. This is the key to property investment and I hope you are as excited as I am about sharing this with you. Let's start at the top of the model because that is where we are right now in the Australian investment cycle. Low interest property investors are filled with "Optimism". People rush into buying investment properties because the cost to "Hold and Control" these properties is minimal. The market moves quickly into "Excitement" and "Euphoria" as property prices escalate and everyone is making money. That is what has happened to the Sydney and Melbourne markets. Prices are now "Unaffordable" and the government called on the Australian Prudential Regulation Authority" to reign in the banks lending to property investors. The banks have been pressured into raising the bar for lending to investors and most of the banks now have a premium interest rate of 0.25 higher than owner occupier loans. I have written extensively over the years about how the government and their lackey regulation authorities consistently get it wrong. Sometimes I feel I am a lone voice in the wilderness because most commentators are wary about getting on the wrong side of these regulators. I don't care -  I will call it as I see it.

Try and persuade property owners in the many of the regional towns and capital cities (other than Sydney and Melbourne) within Australia that their properties are in a market that is out of control and overpriced.  With the Federal Government it a 'knee jerk' reaction and a case of them pretending they are trying do do something about the Sydney and Melbourne property markets. In the case of APRA it is a case of justifying their cushy government jobs and flexing their muscles to show the Government what a good job they are doing. It is about the cycles and not about government intervention

Back to the "Cycles & Emotions" model. The rising property market gives investors the confidence and money to play the stock market. Banks lend share market investors money and we all are making money as the share market rises. However the "Economic Cycle" (the cycle again)  now takes over and inflation starts to rise. People will enter into the  "Anxiety" phase  because they have invested heavily into the property market and stock market and rumors of increases in interest  rates are published by the media.  Interest rates will rise because they always do in inflationary periods and people put the blinkers and enter into "Denial" . When interest rates rise investors retreat from the market and property and share prices begin to fall and investors enter into the "Fear" and "Panic" phases and sell - sell - sell. Why don't the  experts and investors see the 'bigger picture'?

In previous article I wrote this year I discussed how mining, manufacturing, big business and governments affect the property market. These factors usually precipitate the next phase in the Cycles above. Ensure you have the knowledge of where the money is being spent in Australia then....... follow the money. Click >>> THE MONEY to find our more.

After taking the time and effort to read this article I trust you grasp the concepts. If you need help buying or selling property give James Cagney a call: +61 416 137 645 to get a frank appraisal of the property market. As you can see James has a good understanding of the Cycles. He can help you to make money. Or simply click >>> HERE and he will contact you.

In the next article I discuss specific regions, cities, towns and suburbs in Australia and where they fit into the Cycles above. Most property research companies will have released their January 2017 figures in the next few days. I will study these and the "expert opinions and market predictions for 2017". Let's see who is on the money and  who has already missed the mark. As always I will give you my views.

DISCLAIMER

This is not financial advice. You should not act solely on the basis of the material contained in this article for your investment strategies. Changes in government and legislation occur frequently and without prior notice and financial markets are unpredictable.
Please note that the information herein is of a general nature only and is not intended as specific advice for any particular person or entity.

This information was written and compiled by James Cagney.  The opinions expressed herein do not necessarily represent the views and opinions of his associates including
Asset Finance Pty Ltd.

ACKNOWLEDGMENTS:

Thank you to the resources of Terry Ryder, Property Observer, The ABS, BIS Shrapnel, Michael Matusik, Property Monitors, Colliers, On the House, Corelogic, RP Data, Residex, SQM, Herron Todd White, NAB Residential Property Survey, Australian Bureau of Statistics, Peter Wargent, Port Phillip Publishing, Economy & Markets, Harry S. Dent and the many others for the material discussed above.

 

 

 


Author: James Cagney
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