Housing Market Activity: Even Covid-19 Can’t Stop This Cycle

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The Real Estate Cycle and Australian House Prices

Take a look at the graph below…

It’s the ‘Mortgage Bankers Association of America’ Purchase Index


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Source: Bloomberg

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It’s basically a report of mortgage loan applications in the US.

But it’s also used as a leading indicator of housing market activity.

It gives a lead into home sales some four–six weeks in advance. As well as market sentiment and buyer demand.

And right now, amid the COVID panic, the volume of purchase applications recorded is the greatest since 2009.

See this quote…

“The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said Joel Kan, MBA’s executive at the helm of industry forecasting, in a statement.

And as the US removes more COVID restrictions, it’s likely that demand will continue to rise.

The surge in demand is not isolated to the US.

The same is happening in the UK.

The Financial Times reports that:

A release of demand for property in England, suppressed by the lockdown, pushed the number of sales agreed in early June above pre-coronavirus levels.

You couldn’t have predicted it by looking at the dire economic forecasts.

The World Bank is forecasting the COVID recession to be twice as bad as the 2009 recession.

And that would not be a pretty sight. Take a look here…


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Source: World Bank

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What about the Australian Land Prices?

Here’s the thing though…we did predict it.

And as Australian states continue to come out of lockdown — I expect the same to happen here.

In fact, in some sectors you can already see it.

There are reports showing that WA land market activity has skyrocketed ‘virtually overnight’.

Sales doubling and buyer inquiries soaring past boom levels on the back of generous new home building grants.

Why is all this no surprise?

A study of US history reveals there are speculative waves that create a boom and bust pattern in land values.

One of the first to identify it was Dr Homer Hoyt.

Hoyte was a US economist and real estate speculator.

In his classic 100 Years of Land Values in Chicago, 1833-1933 (published December 1933), he uncovered five major real estate cycles.

These peaked and crashed in 1837, 1857, 1873, 1893, and 1926–29.

Hoyte showed the cycle functioned like clockwork. Following the same pattern, in the same sequence…over and over…

He didn’t realise it at the time — but his cycle applied nationwide.

Hoyte’s findings correlated with others such as Arthur H Cole, Philip Cornick, Lewis Maverick, Frederick Lewis Allen, Harry Scherman, Carter Goodrich, Ernest Fisher, Homer Vanderblue, Herbert Simpson, Roy Wenzlick, Clarence Long…to name but a few.

Hoyte carried his research back to 1833.

But this is not where the real estate cycle started, of course.

And neither was it limited to the US!

In the book The Power in the Land, UK economist Fred Harrison identifies ‘the first long real estate cycle in the history of industrial society’ between 1795 and 1815.

American economist Mason Gaffney links major historical events such as the 1720 Mississippi Bubble (The South Sea Bubble) to land speculation.

In Europe, French scholar M E Levasseur (1892), published data on Paris land prices between 1200 AD and 1799, noting similar cyclical patterns.

Significantly, aside from episodes of war, the cycle has rarely been interrupted.

Australia hasn’t always fallen into lockstep with the US real estate cycle.

But we have synchronised with the last three major downturns — and that should be enough to make you take notice.

This has been at 18-year intervals recession to recession — 1973, 1990/1991, and 2008. (Just missing the last major bust due to the big housing stimulus package implemented by then Prime Minister Kevin Rudd.)

Right now, we’re mid-way through the 18-year real estate cycle.

This is the point that UK Economist Fred Harrison terms ‘the mid-cycle recession’.

It’s a recession that affects the stock market and general economy.

However, typically real estate values sustain.

The banks are in a better position to weather the downturn.

And with no real estate crash, the economy eventually recovers into the second leg of the cycle. It’s often stronger than the first.

This knowledge enabled us to inform subscribers of Cycles, Trends & Forecasts years in advance of the current economic downturn.

But it also enabled us to speculate that despite job vacancies and job losses at record levels, real estate wouldn’t crash, and demand for property would pick up quickly.

In the US that’s precisely what we’re witnessing now.

I tipped WA for an upturn in advance of the recent upsurge. And buyers were able to get in early. We’ve got a long way to go.

Sincerely,

Catherine CashmoreSignature

Catherine Cashmore,
For Profit Watch

PS: Australian market expert, Callum Newman, reveals the unexpected impact of the lockdown he sees on the property market — where real estate prices could take a short-term hit before quickly rising to new heights. Click here to learn more.