Timing the Real Estate Cycle

Ka-ching! Did you see the news? The world’s property markets hit an all-time high of $13.6 trillion in 2014. Not only that, somewhere along the line the world switched from being concerned about another crash to another bubble. Where do you sit?

Over at Cycles, Trends and Forecasts we expect property to keep rising until the next peak in 2019. We’ve said that since the first issue in June last year. Keep that date in mind. I’ll come back to it later.

Another bubble looks unlikely at this stage of the real estate cycle. Property advisor DTZ attributes the 4% rise across global property markets in 2014 to cash rich investors seeking returns in the low interest rate environment. In dollars, that’s US$771 billion in global real estate deals last year. That’s important — it’s equity mate!

According to the Financial Times:

By contrast leverage fell in every region, as lenders continued to scale back their exposure to the property market. They have been in retreat for half a decade, since the financial crisis.’

That trend won’t last for much longer. We merely need to take note of it because the real estate cycle won’t collapse until the debts ratchet up to totally unsustainable levels. That is to say, there’s a long way to go yet.

The poster child for this property cycle is not Sydney or Melbourne, but London. It might seem a long way from Australia but there are lots of clues out in the world for us here in the Antipodes. Australia is unlikely to enter any serious recession unless our major trading partners do first.

Considering the British banking system was bust seven years ago, the staggering rise of London from the ashes of the global financial crisis is something to behold.

Last week The Wall Street Journal showed just how impressive that move has been in commercial property, which you can see here…

To give some idea of how much money has poured into London, Real Capital Analytics says the value of commercial property investment in the UK capital has been on par with all of Germany for the last five years.

We don’t have to look far to see who’s seeing the benefit. From the WSJ:

Property investment funds run on behalf of the Church of England and the Duke of Westminster—and one legally owned by the queen—have been sitting on broad swathes of central London for centuries. More recently, those portfolios have reaped gains as strong demand has driven up real-estate prices sharply.

The Duke of Westminster owns a £6 billion real-estate portfolio, the jewel of which, according to the WSJ, is a 300 acre London estate that’s been in the family since 1677. Back in those days it was marshy pasture. Today it’s the elite suburbs of Mayfair and Belgravia.

Over at Cycles, Trends and Forecasts we spend a lot of time pointing out how the vested interests behind the scenes manipulate public policy. That’s to ensure the process that turns worthless cow paddocks into urban riches won’t be tampered with.

As you can see, it’s been going on for centuries. And history will repeat because the game essentially remains the same. This gives us confidence that indicators that have worked historically will keep on working. One of those indicators is what we call the Cantillon Indicator. It’s been working since 1837.

Richard Cantillon was an Irish banker of the early 1700s. Today he’s recognised as the first economist to suggest that a change in the supply of money and credit will affect the economy by changing prices.

Cantillon recognised that an increase in the availability of credit would result in economic expansion but that ultimately this would be overdone as prices rose.

He showed that market prices are derived from the supply and demand for credit. More importantly he showed that when a credit boom leads to inflation, that inflation does not show up equally across all goods and services.

As far as real estate goes, if you want to know where we are in the real estate cycle, and whether you should be fearful or greedy as an investor, all you have to do is look around. Specifically, you have to look up.

Why? One of your best guides to timing your investments is seeing when major tall buildings are due to open. That’s because tall buildings are a visible reminder of easy or easing credit conditions.

Although the skyscraper is considered an art form, its construction is essentially a business. In other words, the builder will be constrained by the economics of the time and how much profit can be generated.

Most books about skyscrapers do in fact point this out. Writer Ada Louise Huxtable wrote once, ‘Architecture simply doesn’t count… With pitifully few exceptions in the past, New York skyscrapers have never reached for anything but money.’

Such architectural writers also point out far more frequently than do economists that easy financing underlies all building booms.

The most notable building under construction is The Kingdom Tower in Saudi Arabia — or the Burj al Mamlakah in Arabic — which will be the world’s tallest building when it’s finished in 2019. But it’s not alone. We’re tracking a cluster of them.

Here’s why you need to know: ‘tallest’ buildings have a consistent habit of opening at the height of recession. They get built in the good times but they usually open empty.

The most famous example is of course the current world’s tallest — the Burj Khalifa in Dubai. It opened just after the Dubai World debt crisis spooked the world and the collapse of the six-year real estate boom in the emirate.

I mentioned the clues London could give us earlier. The Financial Times reported on Tuesday: ‘Plans have been announced to build the City’s tallest skyscraper, in a sign that office construction in London is starting to boom again…

When is it due to open? 2019. Get the rest of the timing here.


Callum Newman+,
For Markets and Money, Australia


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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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