Timing and property cycles

One of the most important investment principals is understanding markets move in cycles. The nature of the cycle is hard to predict, but history gives us a guide. Property markets move in cycles of around 5-10 years, usually around the same time of the overall business cycle. Sometimes 7, sometimes 12. But usually within the 5-10 year cycle band range.

When the market is hot, everybody forgets about the cycle. Nobody feels like a slowdown is coming. But that’s also true when the market is weak, like it is today for Australian residential property.

King Solomon said it beautifully - “There is a time for everything, and a season for every activity under the heavens” (Ecclesiastes 3:1)

This ancient wisdom helps us form an important investment principal known as “mean reversion”. Over the course of the cycle, investment returns will revert towards their mean (also known as average).

We’re also going through a normal credit cycle, where risk starts to get re-priced. These cycles can be wider in time frame, maybe 10-15 years. Its important to remember that the Covid era, zero interest rate environment, created a lot of market inefficiencies which need time to flush out.

Private credit has a lot of problems hidden under the bonnet, particularly in construction lending. They will eventually come out and the market will start to price risk more appropriately.

That will create opportunities for the patient investor. I spoke a few weeks ago about the prestige market looking attractive, other markets will start to open up in coming months. There will be light at the end of the tunnel, but we probably have a little further to go before the bounce starts to resume.