Saturday, April 2, 2016

Something for the weekend ?

The 18 year property cycle

A bit cringe worthy but no surprises there! First came across this in Harrison 's Boom Bust book. Is this Libby's reason d'etre ? Comments are based on the download.

Posted by techieman @ 06:58 AM (5712 views)
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31 thoughts on “Something for the weekend ?

  • tenyearstogetmymoneyback says:

    I think eighteen years might be long enough for any memories of the last crash to have disappeared from buyers minds.

    About ten years ago we were having to explain to a young colleague who was buying his first flat that “of course prices
    haven’t always gone up”. No fault of his that the last major dip had happened when he was about 13.

    “Those who cannot remember the past are condemned to repeat it.” – George Santayana

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  • 2008 + 18 = 2026.

    This clearly would link with the cycle of birth and coming of age. No surprise there, with generational fluctuating trends. Of course, this disadvantages some who come of age at the wrong time in the cycle and vice versa, where we see different ends of the generational spectrum having different times to get a home, have children, etc. within biological limitations.

    For example, those who are mid-30s now, if there will not be affordability until 2026, well, they have achieved a Darwin award unless they are willing to make serious concessions, as we have, by moving to the poor side of town.

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  • liberttass’s addition is sound but this time around there was no real correction in the UK. The Government pumped money in on an unprecedented level and therefore the cycle has been disturbed, think Japan.

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  • Where you are wrong Pete, is that you do not see government as a market participant.

    There are private vs public cycles, i.e. the role of government grows and wanes over time. Sometimes they take a back seat, other times they get involved, but that is still part of the long term cycle because this has always been the case. So far as I see it, the 18 year cycle is likely here or, it could have been extended.

    Regarding Japan, completely not relevant, because they are suffering cyclical deflation more so than anywhere else due to a demographic collapse (vs London, where population is soaring), Italy compares better to Japan because their population is also falling. Japan also had more technology and robotics, which is amplifying that trend there more so than here.

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  • The interesting thing (for me) is that I follow and use JM Hursts methods for cyclic analysis of the markets.

    There are 3 things from Hurst’s theories. 1. That there is a Mid Channel Pause. 2. That each cycle can be distorted by underlying trend (i.e the loner cycles). 3. That unforeseen fundamental events can distort the cycles (albeit just temporarily… sometimes).

    Harrison has commented less on his analysis recently but he has said the following

    “Fred Harrison: We can be sure of the repetition of the 18-year periodicity (+/-), subject to the absence of relevant overwhelming shocks to the capitalist order. Those shocks include (1) a world war, or (2) a reduction in the privatized portion of rental flows to the point where the incentives to speculate in land are significantly diminished. None of the responses to this latest crash alters the DNA of the capitalist system. So there is no reason to believe that past history won’t be repeated.”

    2019 is the predicted year of the mid-term recession (google Harrison and 2019) – e,g Epoch times 25th March 2016.

    The overriding question – to my mind – is has Georgie implemented (2) by his forays into the BTL sector?

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  • As for demographics. Germany replaced an aging population with many Turkish workers, however Germany is a very different market e.g tenants buy in to rentals as they supply their own kitchens or buy the kitchen fro the previous tenant.

    Harry Dent is often commenting on the baby boomers reaching retirement age and/or downsizing, as the cause of the us real estate falls and the ceiling to any reversal.

    Id actually like to see a good demographic analysis for the UK and correlations. My view is you cant sell expensive property to the next generation unless they think that property will continue to rise to ever more unaffordable levels.

    Maybe they do think that 🙂

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  • stillthinking says:

    The government seems to have no upper limit on intervention in the housing market being responsible for interest rates, immigration, housing benefit and availability of planning permissions.

    Having said that, within the majority that support this electorally, are those who are heading straight into pension caps because part of current policy is low yields to prevent markets from clearing. I think there are many people who have no desire to sell their homes, but won’t have the pensions they imagined.

    Having said all that, I have been looking for work recently in IT and suddenly there are many many jobs available in Leeds, salary down from London of course, but when I check property costs in Leeds not at all unreasonable. You can definitely argue these dramatic price increases are only really in London.

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  • “My view is you cant sell expensive property to the next generation unless they think that property will continue to rise to ever more unaffordable levels.”

    As I pointed out in a previous post, compared to renting, one can still be better off mortgaged in a falling market due to the fact that they are over time paying off the mortgage. So long as that off-sets the property price fall, they can still win out in a falling market due to the alternative being throwing that money away in rent. I personally think that the break-even level is about 3% fall in price per year.

    So long as you own for at least 25 years, you are immeasurably better off in retirement, due to not having to pay rent at all and due to owning the property outright, noting that rents will be indexed to the wages of the average worker, even when you retire on a fixed income. Again, the investors discussing investment in property vs stocks do not take this into account, but it is difficult to quantify the vast benefits obtained from owning a property outright in pensionable years vs renting through them.

    Furthermore, when folk sell to rent, they still participate in the property market, propping up another person’s investment, and so it really is a zero sum game if everybody sold to rent.

    You also have to factor in the security one feels and the ability to personalise your home, which does not occur in a rental. These intangibles are difficult to quantify but they exist.

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  • I commented on that thread. Historically there have been times in places where owning has been a terrible decision for many years. It’s just in recent history in the UK where this has not really happened. Except perhaps late 80s early 90s.
    Your home is only worth what someone will pay for it when you sell.
    But really timing IS everything.

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  • Yes, timing is everything, if you hold the property for 25yrs you own it outright. If you rent for 25 years, you own jack squiddly squat. This equation is correct at all times in all places for the vast majority that do not default.

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  • libertas (Sunday, April 3, 2016 10:02PM) – there is a big difference between theory and what happens in practice in the UK residential property market. I have advised all sorts of people from all walks of life over the past 20+ years and many only learn that property is an illiquid asset when they need liquidity. I have a high profile ex professional footballer in that very position right now !

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  • So in Libby’s book timing is irrelevant since it’s ALWAYS the right time to buy :).

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  • So in Libby’s book timing is irrelevant since it’s ALWAYS the right time to buy :).

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  • So in Libby’s book timing is irrelevant since it’s ALWAYS the right time to buy :).

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  • So in Libby’s book timing is irrelevant since it’s ALWAYS the right time to buy :).

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  • Whoops ! Although probably worth highlighting 4 times is likely overkill. Internet probe. .. apologies!

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  • crash bandicoot says:

    Excuse me for being a bit slow on the uptake but when does Libby think it’s the right time to buy?

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  • Crash Bandicoot. Depends when you can afford to buy and when you plan to sell. The bigger question is, when not to buy, i.e. are we a few years away from a bubble. With me stating that the top is possibly 2026, I would say buy until maybe 2023? But at the end of the day, how can you possibly time it? My simple point is that you can even make money in a falling market when comparing paying off a mortgage with renting. Of course, serious losses are incurred if you bought in 2007 or 2006, but those who purchased in 2005 and before would be breaking even to winning, vs renting.

    Best time to purchase is when you are zero years of age, i.e. if your parents purchase you a flat on your birth with a 5% deposit, say, and put it in the baby’s name with it held in trust, it will be fully paid off by the time they are 25yrs old and have left University. This would be the case pretty much any point in the business cycle. In fact, that flat, could likely fund deposits for four flats for four children with possibly money left over for University fees.

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  • I’d ask whether [natural] cycles have any use when markets are now so rigged.

    The problem now is that everything is now so connected and now so massaged, it doesn’t make much sense to talk about housing in isolation.

    Fifteen years ago, we could have had a lovely property smash & crash without it destroying the whole economy……and that is where we are now. If one thing goes, it’s likely to bring everything down including banks, central banks government, economy etc. As a saver, I find that a pretty scary prospect; gold is always good though, and the only insurance likely to get one through some potentially very nasty years.

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  • – another thought.

    The problem is the massive debts everywhere, of which NIRP is just a mechanism to help with management of debt. The only game in town is now inflation and devaluation to get rid of the debt. The effects of this will counter deflation, which is an added bonus.

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  • Yes, owner occupation is obviously superior to private renting – the worst tenure in the UK and worse than any other in major economies. But the vast majority of private renters are simply not in a position to escape. Even lowering expectations to a crappy area still requires a large deposit, which most simply don’t have. And there comes a point where the costs of a commute wipe out any savings for those who have enough of a deposit to buy hours away from where they work

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  • libertas: “If you rent for 25 years, you own jack squiddly squat”
    Dead money eh? In fact you will own whatever you used the capital for instead of house purchase, which may or may not be worth more than the alternative of a house. You typify the UK bias that has helped support crazy prices. But as the others point out, this cannot be guaranteed to continue indefinitely.

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  • @22 good point on opportunity cost. What will happen to folk who have other assets but no home when they retire? Those with no assets and no home get a handout to a landlord. Those with assets are expected to run them down paying private rent, an effective very high tax rate. BUT – at some point when the pot of money for old age welfare gets more and more inadequate, might we expect principal residences to be brought into the assets that need to be liquidated before dumping yourself on the taxpayer in old age?

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  • But if you do not own your property, a more significant opportunity cost is that you divert mortgage payments into rent. This makes almost every other investment less effective. As I have said ad-infinitum, property only becomes a worse investment relative to others for those who already own a house and have additional cash to spare.

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  • libby you miss the point – a property is, or should be, a place to live not an investment. its clear u have little to add to a debate. Everyone wants to own a home but really at what cost? 10 x their income ? 50 x? 100 x?

    Just because asset prices have risen it doesn’t mean they are gonna keep rising. You say you believe in cycles. Well Hurst states that there are an infinite number and wavelength of cycles and that longer cycles influence the shorter cycles. So is it a coincidence that 3 x 18 = 54? The idealised K wave?

    If that is the case how will the 4th cycle of the 18 year nominal cycle fit in with the new K wave? Is the cycle always left translated? http://hurstcycles.com/the-perfect-mid-channel-pause/#sthash.gJdzcNCn.dpbs

    The real question is therefore do we need to time the market and if so does any unforeseen fundamental event skew the cycle?

    A final thing to ponder. We had a real gold bug on here who used to tell us Gold would keep going up. Gold is a homogeneous product and – regardless of “manipulation” – easier to forecast and trade the swings. A couple of us kept saying that he should think of selling some and each time we were shot down in flames- albeit politely. of course the rest is history.

    The point? when you predicate your investment strategy on an asset – especially if its an illiquid asset – then you have to be carefull and buy abnd sell at the right time.

    As I have said history has many booms and bust and the arguments postulated for a continuing property boom are exactly the same as those by the Japanese in the late 80s , Florida in 1925, Dublin in the 90s and most of the US in the noughties.

    You may believe that the cycle is not at a “blow-off” phase and it may need to be, or some might argue we have already had the blowoff phase. Personally I think this cycle will be shorter as most of the other cycles have topped, but ofc I may be completely wrong.

    in a commodity oor futures market – excepting limit moves – you can always liquidate quite quickly. With property …. not so easy! Food for thought?

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  • Techie man, you are completely wrong. Housing IS an investment SHOULD be an investment into a person’s retirement because how do you pay rent on a fixed retirement income?

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  • Put it another way, theoretically, buy one place early in your life, spend 25yrs paying a mortgage that gets cheaper in real terms over time (wages rise, outstanding loan falls). Or, pay rent that is pretty much indexed to the wages of folk in your prime, for, say, 50yrs, including during the time that your real income is falling, during retirement.

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  • techieman (Thursday, April 7, 2016 06:17AM) – very good post (IMO)

    libertas (Thursday, April 7, 2016 06:34AM) – If I didn’t know better I would think you were winding everyone up Smugdog style !

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  • Thanks Jack….. but Libby if it IS an investment then you have already said there is no point in timing it because any time is the right time to
    buy.

    To my mind it isn’t an investment and people shouldn’t look at a place to live as such. Its a place to live whether you make money on it or not is not really relevant. The cost IS relevant – so yep fine when IRs are low but not so fine when they are raised, It seems to me that whatever anyone suggests you will remain blinkered in your outlook. Which is of course your right (not you’re right :)).

    IF it IS an investment then like all investments it must be timed, to say otherwise is nonsensical! So if you are right (that its an investment) its you that are still wrong (it doesn’t need to be timed) :).

    Later I will likely put up a MIRAS- based article which (as myself and other have said does seem to have some relevance to Georgies tinkering with the BTL market) . As Harrison says – as the main proponent of this particular cycle theory – which I included in a point above but you seem to have conveniently missed.

    “We can be sure of the repetition of the 18-year periodicity (+/-), subject to the absence of relevant overwhelming shocks to the capitalist order. Those shocks include …… (2) a reduction in the privatized portion of rental flows to the point where the incentives to speculate in land are significantly diminished”

    AGAIN isn’t what Georgeie has done exactly that ? i.e. “reduced the privatised portion of rental flows to the point where … incentives to speculate are significantly diminished.”? Look at yields . Net yields are what ? 1-2% if that?

    So as 10 years said if you bought at the wrong time then you will have incurred paper losses which were a high percentage – much like your paper profits now.

    As for inflation – again you are extrapolating the past and relying on that for the future. You may be right but I disagree. (you have a lot of company here btw!).

    The whole point of cycles is that they can be longer or shorter than the prior cycle of the supposed same length and amplitude. We have had the great moderation, we have had the GFC. What happens next?

    Keen believes that HPI has to be stoked by the change in the change of mortgages being provided. Very simply, a slowdown in the rate of growth of private debt will cause a crisis, if both the level and the rate of change of debt are high at the time of the slowdown.

    Notice Keen concentrates on Private debt and not Public debt. Public debt is used to offset any subsequent collapse / liquidation (by repayment or bankruptcy) . Even though Cameron et al go on about cutting the deficit its still a DEFICIT! Of course we have pushed the can down the road but if we were at a “normal” place with a “normal” recovery do you think IRs would be at their current level?

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  • libertas”a more significant opportunity cost is that you divert mortgage payments into rent”

    Eh? Mortgage payments are a kind of rent – rent of the money you borrow. If rent to the bank is more than rent to lease then you are worse off owning, unless capital appreciation compensates. I’m sure you know all this. The advantage (and potential disadvantage) of housing is you can borrow pretty heavily to bet on the price. In days of high inflation and reasonable valuations that was a good bet. Now it’s a lousy bet.

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  • Did anyone else clock that adding 18 years from 1818 (the first peak) onto each successive peak, comes to a peak in 2016?

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