Timing the Market for Maximum Growth

One of the most common questions readers ask me is, ‘When is the right time to buy?’

The two most common assumptions are as follows:

• You buy at the bottom and sell at the peak (and vice versa).
• It’s ‘time in the market’ that matters, not ‘timing the market’.

Both assumptions are somewhat incorrect!

As a buyer, timing the market is essential if you want to maximise growth.

And with knowledge of the cycle and how it plays out in Australia, you can do just this.

Let’s briefly break this down so you’re aware of how it looks.

As subscribers to Cycles, Trends & Forecasts will be aware, the real estate cycle in Australia now correlates with an 18-year cycle.

In his 1983 book, The Power in the Land, UK land economist Fred Harrison identified a consistent, 18-year movement in land values in more than 400 years of English history.

And the late economist Fred Foldvary identified an identical pattern in the US.

The basic breakdown of the cycle is 14 years of generally rising land values plus four years of falling property prices.

However, bear in mind the rise in prices can go on for longer (16 years, historically) and the fall shorter. It largely depends on local policy and the level of speculation in the lead-up.

What is consistent, however, is that there will be two recessionary points in the cycle. I’m talking about a time when unemployment will typically skyrocket, and many businesses will be forced to close.

The mid-cycle recession midway through is the first.

This doesn’t lead to a crash in real estate values. However, it will affect the stock market and can push the general economy into either a major or minor recession.

Think; the early 1980s downturn, the 2001 dotcom bust, and the most recent COVID recession.

It’s important to note, though, that a slowdown in property prices in Australia doesn’t always correlate with this mid-cycle recession!

It can come just before or just after.

This has been the case in this cycle.

Real estate values went backwards throughout 2018 into mid-2019 before recovering strongly.

COVID had minimal effect on values in comparison. (Although, if you did purchase in 2020, you’d be very happy considering the strong rise that has occurred since!)

And the slowdown in 2022 following the COVID mid-cycle panic, as with 2018, was also significant.

In contrast, the end-of-cycle recession — at the culmination of the 18-year cycle — is consistent.

The recession that hits the economy following a stock market crash will also crash the real estate market, and the downturn can be lengthy.

The only exception is if there is strong government intervention to prevent the downturn in prices, as Australia saw in 2008 during the global financial crisis (GFC).

I’m talking about substantial home buyer grants, stamp duty cuts and so on.

Also note that, unlike the US and UK, in Australia, the 18-year cycle — although evident in the stock market — has not always been clear in the real estate market.

This is because it can only be seen when there is speculation on rising land values.

You might find it hard to believe, but land prices in Australia remained stable and affordable for long periods in history.

Rent controls and federal land tax policies through the early-mid 1900s played a hand.

However, those days are gone!

We are now in the fourth ‘grand cycle’ since the Second World War.

A consistent boom/bust real estate cycle.

The dates for the first three ran as follows…

• The first cycle — 1955–74
• The second cycle — 1974–92
• The third ‘grand’ cycle — 1992–2010

Should history repeat itself, our current cycle will run from 2010 to the bottom in around 2028.

Remember, however, the cycle is most evident in Melbourne and Sydney. Other states and territories tend to stagnate through the first half.

So, when doing analysis on timing the market, we look toward these two states for clues to market turns.

The other thing to take into account is that if you work in the Aussie real estate market for a few years, you’ll recognise that median prices rarely rise past a 3–5-year period of growth before hitting a period of falling or stagnant prices.

The only exception to this is when there is government intervention (as we saw post the 2008 crisis), with home buyer grants introduced to prevent the market from crashing.

If intervention comes at the end of the cycle when the market has already started its downturn, prices will stop increasing when the incentives are pulled back.

There is no strength in the underlying economy to support otherwise.

This was the case after the GFC when the home buyer grants implemented to forestall a crash were withdrawn in 2010.

A period of stagnant prices followed before the market commenced a strong upward trend (in 2012) into the first half of the cycle.

Outside of intervention, the 3–5-year period is an important period to remember in relation to the Australian cycle.

These periods fit with the larger pattern of the 18-year real estate cycle.

Looking back at previous periods of strong price growth through the last two cycles indicates the pattern…

1998–2003: Five years
2004–08: Four years
End of 2012–17: Five years
2019–22: Three years

Over the last three cycles, residential property market downturns have typically taken 1–1.5 years to play out.

Roughly speaking, these are the periods during which prices were falling within the two halves of the 18.6-year cycle…

End of 2003–04
End of 2010–12
End of 2017–19
End of 2022– beginning of 2023

You can see them on the chart below — based on the CoreLogic daily index.

The exception was the early 1990s downturn, which was somewhat expected as it came at the end of the real estate cycle. Prices took some years to recover. The market didn’t start a consistent turn until around 1995.

2008 would have played similarly had it not been for government intervention and exposure to China’s demand for our minerals.

The point is, rarely — if ever — have we seen the property market start a turn upwards only to pull up a few months later and reverse track.

I’m not saying it couldn’t happen — policy always influences the direction of the property market. Rate rises, hikes to land taxation, rent freezes, etc., all impact supply and demand dynamics.

However, if we’re looking at history as a judge of how this cycle will progress, we would expect markets to continue their push now into a peak in 2026.

So, when do you buy?

As I said before, buying at the bottom isn’t always the wisest plan if you’re searching for the greatest gains.

Ideally, you want to step in just as the market is beginning to turn.

This is what we’re experiencing now, and I expect it to continue to the forecast peak.

Why?

Well, a few reasons.

Capital city vacancy rates remain at record lows.

The number of properties listed for sale continues to decline across the combined capital cities.

It’s now 26.4% below the five-year average.

As a result, home values continue to rise — increasing by 1.1% in June and by 2.8% for the June quarter.

ABS released lending data showing a notable rise of 4.8% for housing — with a specific increase of 6.2% observed among investors.
Construction activity remains subdued.

We’re still in a situation where it is cheaper to purchase established housing than it is to build a new property.

And, of course, the fire in the wind is the record number of immigrants flooding primarily into the East Coast states. We don’t track the money they’re bringing with them for accommodation needs, but it’s not insignificant.

Meanwhile, the banks are — of course — going to keep things rolling.

Australia’s largest lender, CBA, saw its total mortgage book grow to more than $544 billion by the end of May — an increase of more than $2 billion.

In a bid to gain clients, the majors have been tweaking their offerings.

Both Westpac and CBA rolled out reduced serviceability buffers for certain borrowers, while ANZ remains the only big four bank to have a cashback offer in the market.

It doesn’t mean that every area, and every property, is performing marvellously.

But overall, the property market cannot collapse under these conditions!

It will continue to trend upwards — and, as mentioned above — reach its likely peak in 2026 before a collapse into 2028.

There are gains to be made in both the property market and the stock market (from property-related stocks) through the final few years of the cycle.

These are historically the most bullish.

Particularly as we head through the 2024–26 period.

Best wishes,

Catherine Cashmore,
Editor, Land Cycle Investor