Tick - Tock

17 on the property clock

The 18-year real estate cycle - where are we now?

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• What’s on our mind: Today, we check to see where the Australian property market fits on the ‘18-year real estate clock’…

• What happened this week: Inflation numbers put pressure on the RBA to raise rates further
  What are we watching next week: AUS building approvals and retail sales data

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Prelude:

What’s on our mind:

This week we thought about where the Australian property sector is relative to the “18-year real estate clock” - a concept developed by economist Phillip Anderson. 

Anderson came up with the idea after looking back at the history of property cycles.

At a very high level, the clock shows an 18-year cycle (14 years up, 4 years down), split as follows:

1. Hours 1-16 (representing 14 years up) 

2. Hours 17 to 24 (representing 4 years down)

The clock shows how property cycles play out from start to finish and the types of behaviour we see at any given point in the cycle. 

We sent the clock to people in our network and asked them to tell us where they thought the Australian property market sat relative to the image. 

The answers varied between 16 & 17….

We think it’s closest to the 17 handle…. 

Here’s why we think Australia is at 17 on the property clock:

1. Hours 1 to 6 happened between 2010 and 2016 - Gross and “real” rents increased significantly between the mid-2000s, reaching a peak in 2015 in real terms. The data below shows how nominal rents increased ~60% between the mid-2000s and 2015.

   

   (Source)

2. Hours 6 to 10 happened between 2016 and 2019 - Construction activity took off starting in ~2016 and peaked in ~2018. Credit growth also took off and peaked in ~2017. “Expansion of banks” and “Easy Credit” were so prevalent that the Australian government was forced to launch a royal commission into bank lending… 

(Source)

(Source)

3. Hours 11 to 12 happened in 2019-2020 - the “mid-cycle slowdown” happened straight after that royal commission into lending. Everybody remembers how tough the market was getting by the end of 2019… the chart below shows how prices started to come down for a brief ~12 months. 

(Source)

4. Hours 13 and 14 happened between 2021 and 2022 - the second boom phase… Around the world, outrageous projects were announced (think Saudi Arabia’s “The Line”), and construction on big skyscrapers continued… In Australia, state and federal governments committed to huge infrastructure projects, adding to cost inflation across the construction sector. 

(Source)

5. Hours 15 to 16 between 2023 and today - Real estate activity (building and construction) across Australia has been slowing since mid-2023. Building approvals are trending lower, and building starts have fallen below their recent highs. The second factor (confidence) is also high despite the negative activity trend. 

(Source)

(Source)

Where we think the property market is RIGHT NOW:

6. Hour 17 (foreclosures and bankruptcies increasing) - over the past 12 months, bankruptcies have increased across the building and construction sector. We expect the next wave of bankruptcies to come from the overleveraged property developers. We think the market has just entered the four-year downturn phase….

(Source)

How a 4-year downturn phase could play out:

During a 4-year downturn, we expect to see: 

1. Credit growth falling (and potentially going negative)

2. Broader economic activity slowing. 

3. Deleveraging across the housing sector. 

If 2024 represents the 17 handle, then a potential four year downturn could run into 2028… 

Thanks for reading,

Aus_Prop team. 

You can contact us here:

1. On Twitter @Aus__Property 

2. Via email at Auspropertymarket@gmail.com 

3. Or through Substack - Property Down Under