I thought I’d touch on a few points Fred Harrison highlighted in my recent interview with him.
If you haven’t seen it yet, you can do so here.
If you’re interested in getting a heads-up on what’s ahead for this cycle, it’s essential viewing.
The points he raises are worthy of consideration. There’s no researcher with a better track record of forecasting the major downturns in the global economy over the last 40 years or so than Fred Harrison.
When it comes to the end of this cycle however, Fred holds a very pessimistic view.
I put to him one of the most asked questions I get from Cycles, Trends & Forecasts subscribers.
Simply: Where to put money at the end of the cycle?
The premise being that stocks crash, land prices crash, unemployment soars, and there’s no trust that money stored in bank savings accounts won’t be pillaged.
Over to Fred:
‘We’re now no longer talking about individual national cycles… since 1945 we’ve been in a single global 18-year cycle.’
[Note: Prior to this, the major downturn in the UK/Europe and the US was not synchronised. In other words, the UK could crash hard midcycle and the US end of cycle. I’ve shared information about how the cycle shifted previously with Cycles, Trends & Forecasts subscribers. If you’re interested in researching more about the cycle, consider signing up here.]
‘But in the early cycles, that did not include China — but it does now — it didn’t include Russia — but it does now.
‘With the end of this cycle, which is a global cycle, the chaos that will rain, means that unfortunately, that there is no place to hide.
‘There is no place to put your money.
‘And I take a really pessimistic view on what is going to happen when the economy crashes…
‘Take the case of 2008, it was still possible in 2008 for governments to come together and say let’s borrow a lot of money and pour it into the banks that are too big to fail and impose the costs on the people with 10 year austerity and we’ll get past this and get re-elected next time.
‘This next time however, people won’t trust governments, they won’t trust the bond market, they won’t trust equities, they will be all scrambling to get rid of property, but a lot of the funds will be locked into property that they can’t sell quickly to raise cash…’
I’m not quite as pessimistic as Fred regarding the extent of downturn at the end of this cycle; however, the risks cannot be underestimated.
I’ve speculated that the forthcoming downturn — into 2027/28 — will be particularly harsh.
One reason for this is that the last downturn was mild in Australia.
It has certainly worked this way with the midcycles in recent history.
In other words, if one downturn is mild, the next will be severe.
In the case of the midcycle recession, for example:
- The 1960s midcycle was a shallow recession.
- The early 1980s midcycle proved to be a severe recession — high unemployment.
- The 2001 midcycle was mild, and Australia avoided going into recession.
- The 2020 midcycle that we just experienced was a severe recession.
The only commonality with the midcycles is that the (real estate) market doesn’t crash and recovers quickly.
The banking sector is better able to weather the downturn, and prices and leverage haven’t been run up to the extremes we witnessed at the end of the second half of the cycle.
The end-of-cycle downturn always has the potential to hit the property market hard.
- The 1970s downturn hit real estate commercial values more than residential. The losses were particularly severe in Sydney. The market took 4–5 years to bottom and turn (more on the extent of the losses below).
- The 1990s downturn had a prolonged effect on the property market — with values taking around 5–7 years to recover to their previous peak. This differed by state and territory — the decline was felt worse in Sydney and Melbourne.
- The GFC in 2008 was a mild downturn, with property markets rebounding fast, mainly due to government intervention and a strong mining boom.
We don’t know how badly the property market will be impacted at the end of this cycle.
However, because prices didn’t deleverage significantly in 2008 and are still higher than their pre-pandemic peak, I would speculate there’s a very real probability that the next downturn could be harsh.
The depth of the crash depends on the height of the boom. The bigger the boom, the bigger the bust.
As Fred mentioned, we can’t guarantee governments will bail out the sector in 2027/28 after running up so much debt to deal with the COVID panic either.
It’s still preached that government debt is bad. (A good excuse to keep taxes high.) And note that without bailouts, it can take 2–4 years for the property market to bottom.
Another factor is the public’s mentality towards the property market.
It’s been a long time since Australia experienced a property crash on the scale of what happened in the US and UK in 2008 — coupled with high unemployment.
We also must remember that it will be approximately 100 years since the 1930s great depression.
A significant cyclical interval that should rhyme historically.
However, having said all of the above, a few points for investors to consider.
The key throughout the final two years of the cycle (the ‘winner’s curse’ phase from around 2024/25 to 2026/27) is to reduce debt but hold onto quality assets.
By this, I mean the well-located land you may have in your portfolio.
Land never loses its use value.
There’s a lot you can do with land to generate income and sustenance other than selling it.
Further, and more importantly, if you own a piece of real estate in Melbourne or Sydney (or select suburbs of Brisbane), these regions have a historical record of exceeding the previous 18.6-year cycle peak in the first half of the next 18.6-year cycle (assuming there is nothing to interrupt the next cycle).
It reminds me of a colleague of mine at Prosper Australia (and an expert in land cycles) who timed the sale of one of his prime properties in Melbourne to correlate with the peak of the last cycle in 2007.
He had no notion at that time that by 2010, that same block would be valued 25% higher in price — just a short three years later.
Unless there’s a need to pay down debt or access funds, it’s sometimes wiser to hold than sell.
An understanding of the land cycle is invaluable for investors; however, cycles tend to catch even the most knowledgeable with unexpected twists and turns.
I’ll have more on this subject as the year progresses.
Editor, Land Cycle Investor