Today, we’ve got something a little different for you.
I love receiving feedback from subscribers, and we’ve been getting some excellent questions from readers lately. So today, I’d like to take some time to answer them…
As always, if you have a question, feel free to drop me a line at [email protected]. Just know I can’t give personalized investment advice.
We’ll start off with a question about Ricardo’s Rent, from reader Roger P…
I noticed Phil Anderson’s article You’ll Never View Markets as Random Again mentioned Ricardo’s Rent which rang a bell. I have lost track of my notes but some 15 years ago I stumbled on some analysis of Ricardo’s work. I am willing to accept the possibility that my recollection is faulty as to its conclusion that his work had some holes. Would you concur?
– Roger P.
Hi Roger, thanks for emailing in. Ricardo is worth reading. He was the first to identify properly what is termed “Economic Rent,”or the surplus production. Real estate people today would call it “locational value.” I would urge you to get reacquainted with the term. Economics today has written it out of the textbooks… deliberately in my view.
Put “land” back into the economic equations and one can see how it is the foundation for forecasting. Start with my book, The Secret Life of Real Estate and Banking, perhaps, too.
Next, reader Colin L. inquires about how the 18.6-year real estate cycle applies globally…
For those of us who live outside the USA, I am curious to know whether the 18.6-year cycle applies across most or even all developed countries and if so, whether the peak tends to coincide with that in the USA, and whether you expect variations across sub-sectors (e.g. commercial vs logistics).
If there tends to be an offset, this would give property investors an incentive to diversify across US REITs, European SCPIs and Chinese property funds, for example, or across sectors. While global economic headwinds may well impact all countries in the same way, I figure that local issues must have an impact on the cycle – for example the Chinese property developers’ solvency crisis, different patterns of Covid lockdowns, local legislation such as the imposition of energy-saving refurbishments in France and Germany, new patterns of working…
In the UK and France, we see that residential and commercial property prices have already been taking a hit in 2022-23, well ahead of any post-2026 peak. Demand for logistics hubs and warehouse space is still soaring, however. I find it hard to believe that the same 18.6-year cycle applies to all sectors and geographies in the same way.
– Colin L.
Hi Colin, thanks for emailing in. The real estate cycle is led by the U.S.
This is clear from a study of history back to 1800 at least, and prior to that in the UK, back to 1600. This is the central guide, starting with the U.S. But you are quite correct, one must take into account important local and regional variations, and of course to farmland as well, which I don’t touch on much (that being more commodity related).
I remain confident that the cycle has not completed yet and, like in 2003, 1983, 1963, and so on, years that all saw slowdowns in markets from the prior year ended in “2,” the cycle will pick up from here and run well into 2026. It might be hard to see presently, but history supports the proposition at least so far.
Next, a reader wonders when the best time to buy property is…
My husband and I are renting and have been trying to determine the best time to buy. We discovered your work and are very intrigued by the idea of a predictable, 18.6-year cycle. You are currently forecasting 2026 as the turn of the current cycle. Does this imply that 2026 is about the year to buy a “forever home” (to live in, not for investment or speculation purposes), or will it be necessary to wait an additional 2-4 years? Housing prices didn’t bottom out until somewhere around 2012 after the 2008 collapse. Any insights you have are deeply appreciated.
– Rebecca O.
Hi Rebecca, thanks for emailing in. 2026 is very definitely NOT the year to buy, should history repeat… because that year will be the top. Buying is after that, about two years after. However, that will be the time when obtaining credit will be at its hardest… So it’s not easy. And yes, 2012 was a low… 14 years up takes us to 2026. If you recall, the real estate cycle is 14 years up, four years down.
Rebecca, I can’t know everyone’s own personal circumstances, and can’t give personalized investment advice anyway, but I think because of coming advances in technology (which I won’t explain here, but will do in later videos to subscribers of The Signal) I always suggest 2 things to people.
First, make every effort to own your own home and as soon as possible – and find creative ways to pay it off ASAP if you have to. This gives you security of tenure.
Second, do everything possible to make your income as secure as possible over the long term.
If it’s your first time to buy, then there is never probably a “best” time. I’ve just always thought it better to own than to rent. Get creative.
Next, a reader asks Phil about specific regions of real estate…
Phil, can you clarify if you predict the housing market will also go up this year in Georgetown, Texas, near Austin? The new home I bought at end of September 2022 has lost $75,000 value from the price I paid on completion and I have not had one offer.
– Beverly R.
Hi Beverly, thanks for emailing in. I can’t give personal advice… but the cycles I study, whilst providing a great overview of the economy, do not go into specific small regional details.
That’s because there are always regional issues, like infrastructure, that will affect regions differently to others. So I can’t say what’s going to happen in Georgetown directly.
I remain of the view though, that the U.S. real estate cycle still has a few years to play out yet and should be good for a recovery in your area.
Next reader Scott, R. asks about real estate investment trusts (REITS)…
Hi Phil, I read your piece, Mortgage Market is Heating Up with (hopefully) relief. Question for you… as an income investor nearing retirement, I have large (for me) positions in several REITs because of their high dividend yields. Does your encouraging analysis apply to them?
– Scott R.
Hi Scott, thanks for emailing in. While I can’t give personal investment advice, I can say that historically, the second half of every U.S. real estate cycle has been very good for the “FIRE” sector: Banks, Insurance, and real estate.
Conditions also usually improve for those chasing income and the usual higher inflation reduces the discount value of stocks without decent earnings.
Next up, a question from a new lifetime subscriber to my premium service, The Signal…
I would appreciate hearing Phil’s thoughts on recent reporting that the UK residential real estate market is already dropping (London prices down ~5-8% recently) and in the U.S. there are worrying early signs of stress in the commercial real estate market (Brookfield Asset Management defaulted on loans for office towers in Los Angeles and Washington D.C.). In the U.S., credit appears to be contracting and banks are not extending loans. How do these events square with the Real Estate Cycle forecast of expansion into 2026?
– Theron M.
Theron, I know that just at the moment, it can be difficult to see how things might recover. We are at the same cycle area as was 2003 and 1983… and if you are old enough to remember those following years, markets went up big time after, and into year 7 of the decade. I still expect this to repeat.
The cycle can never repeat exactly though, otherwise everyone would see it. Most property really went up during the pandemic (which just about everyone except me didn’t expect) so it is natural that we have a pause afterwards…which is happening now.
History shows that from here, banks will start to get creative and find any way they can to make borrowing easier and housing more affordable even at higher prices. If you are using Twitter, see if you can find me on there as I have tweeted quite a bit about that recently – banks getting creative, 100% mortgages now on offer, and banks really increasing profits lately, which will allow them more credit creation soon.
As for commercial real estate, yes some areas here are going to have problems, no doubt about it. But I expect as things recover, vulture funds will step in and apply conversion processes to find other uses. Then, after 2026, everything will turn down together. This, at least, is what history suggests.
The real estate cycle has a very good pedigree. Let’s see how it’ll go from here.
Next, reader David J. suggests discounted commercial properties will bring residential prices down…
As commercial new properties become increasingly discounted due to oversupply, many that can be converted to residential will be. This will change the residential supply graph and bring residential prices down.
– David J.
Hi David, I agree with you about: “many that can be converted to residential will be.”
I disagree with you however about it bringing residential prices down (except perhaps in some local geographic areas that could see oversupply). History suggests the real estate cycle will continue to 2026.
And then everything will turn down together, sparking panic.
Let’s see how it goes. Have you read my book by the way, The Secret Life of Real Estate and Banking? This will show you why I think as I do and the faith I have in the cycle completing, and completing on time.
That’s all for today. Again, I love receiving feedback and questions from subscribers.
Regards,
Phil Anderson
Editor, Cycles Trading with Phil Anderson