Thursday, 24 February 2022 — Albert Park

[6 min read]

Dear Reader,

The last place you should turn when looking for accurate house price forecasts are the big banks.

Take Westpac, for example.

Back in 2020, they forecast a whopping 10% fall in national property prices between April 2020 and June 2021.

When it became clear how spectacularly wrong that forecast was, they backflipped.

The 10% fall was replaced with a 15% national price ‘surge’ forecast until mid-2023.

That was more in line with where values were heading at the time, of course.

But by mid-2021, the growth in national values had already exceeded their 15% forecast — increasing 22.1% through the 2021 calendar year alone.

Spin forward to 2022, and no surprise, their price projections have flipped again.

In the February 2022 edition of the ‘Westpac Housing Pulse’, the bank now forecasts a 14% fall in property prices through 2023 and 2024.

It reminds me of that old song…‘Up, down, flying around, looping the loop…’

Obviously, the requirement for accuracy isn’t high on the list of KPIs for Westpac’s chief economist.

When you consider that national median prices dropped some 10% in the early 1990s recession — a 14% fall would result in a significant property market crash.

Here’s the breakdown of their current analysis:

It’s hard to understand the reasoning behind some of the calls here.

Fo example, on the above table they say Perth is ‘Looking a bit out of sorts’.

I beg to differ.

In fact, all indicators show that Perth values will continue to increase and gain momentum through 2023–24.

Let’s take a look:

Analysis from the REIWA show sales in established properties in Perth are currently exceeding their last peak in 2013.

This sits against the number of listings on the market that have plummeted to all-time lows:

In other words, demand is well exceeding supply.

Add to the mix record-low vacancy rates that have produced a surge in rents not seen since the mining boom, and rental yields (the country’s highest) easily covering interest payments on a loan in many cases.

And you have the recipe for a boom, not a crash!

In the body of their report Westpac say the ‘WA market continues to look a little listless.’

Really?

It doesn’t look very listless to me.

Median property values in WA rose by 13.1% in 2021 to $520,000.

That looks very cheap to investors on the east coast.

The suburbs roaring ahead are on the beachside.

Through 2021, Cottesloe has grown by 33.2%, Dalkeith by 28%, and City Beach by 37.3%.

A few stories have hit the press recently to demonstrate the gains on an individual property level.

They come from Chris Hinchliffe, director of property valuers at Herron Todd White:

A four-bedroom, two-bathroom home in City Beach. Purchased in March 2020 for $1.85 million. Resold for $2.45 million in August 2021.

A 32% increase in value.

A renovated 1940s four-bedroom, two-bathroom home on a 759sqm block in Cottesloe. Purchased for $2.025 million in July 2019. Resold for $3.8 million in July 2021.

An 88% increase.

A four-bedroom, two-bathroom, two-storey home in Nedlands, on a quarter-acre block. Purchased for $2.9 million in February 2020. Resold for $3.28 million in July 2021 after just 10 days on the market.

A 13% price increase in just 17 months.

How can Westpac’s economists be so consistently wrong?

The travesty here is their failure to study the land cycle.

The knowledge of this little-known secret informs everything we do over at Cycles, Trends & Forecasts.

It enabled me to forecast (during the depths of the 2020 COVID-related panic, no less) that property prices would not crash, but rather Australia would experience its greatest ever property boom from 2021–26. With the smaller states by population gaining the most.

So far, that forecast has played out as expected.

The boom through 2021 has been extraordinary — outside of all expectations.

And needless to say, I’m also very bullish on Perth’s real estate market. For good reason — as I explained above!

Believe me; I’m no soothsayer — with a little knowledge of cycles and the economics that underpin them, you too can make very profitable calls on the market.

What are you waiting for? Find out more here!

Best wishes,

Catherine Cashmore,
Editor, The Daily Reckoning Australia

Dear Reader,

We don’t give investment advice in these daily columns. We just try to connect the dots. And one thing we notice is that they form patterns. Hope…despair. Empire…destruction. Summer…winter. Birth…death. Money printing…inflation. One thing follows another, shaped by some age-old template.

Looking at the stock market, we see long cycles of boom and bust.

The problem with just staying ‘in the market’, may leave you with a losing position for decades. In the US, after the crash of 1929, it took 26 years for stocks to recover, in inflation-adjusted terms. And in Japan, stocks crashed in 1989; they still haven’t recovered.

Trying to ‘time the market’ rarely pays off. But rarely is good enough for us. The most dangerous periods — when stocks are extremely overvalued — are rare too. And even an imperfect system for screening them out can be remarkably helpful.

There are times to hold ‘em, in other words, and times to walk away. There are also times to run. In preview, this is a way to tell when to put on your running shoes.

What we aim to do is only to dodge the ‘big loss’. When you’re young, the ‘big loss’ may be a learning experience. But when you are approaching retirement, losing a substantial part of your wealth can be a bummer.

Lessons learned

How do we avoid it? The stock market has a lot of noise and chop. But it also has long cycles that take it from major top…to major bottom….and back to a top again. There was a top in 1929…and another in 1966. The third major top came at the end of the century, 33 years later. As we suggested yesterday, the cycle seems to roughly correspond to human generations. One learns. The next forgets…and relearns.

On Friday, we discussed using price/earnings (P/E) ratios to identify the danger zones. You might, for example, simply sell out of stocks when the average P/E goes over 20. But there’s too much irrelevant information in P/E ratios to be very helpful. In 2009, for example, in the panic of the mortgage finance crisis, the P/E ratio of the S&P 500 weirdly flew up to more than 100. You might have concluded that stocks were too expensive; actually, they turned out to be cheap. Prices rose for the next 11 years.

Another indicator is the one Warren Buffett favours: Market cap/GDP. Companies provide goods and services. They create wealth, pay wages, and then get the money back as sales revenue. So stock market value cannot get too far away from GDP. Historically, the ratio has usually been around 80% — or eight units of stock market capitalisation to 10 units of GDP. In 1999, the ratio hit a high of 140%...way above the normal range. That was a good time to sell. But the ratio now is even higher — at almost 200%, an all-time record. A simple rule: sell stocks when the ratio goes to more than 120%. That would have spared you the dotcom bubble of 1996–2001 and the everything bubble, 2016 to today.

But we have what we think is a better system. We compare the Dow (with the US’s 30 leading industrial companies) to the price of gold.

…and a refinement that greatly increases the profits, but here are the simple mechanics.

Gold is real money. It is not perfect money, because it is heavy and hard to carry around with you. But it is still the best money ever discovered.

When you compare it to the Dow, you are juxtaposing two things that are in constant opposition, like fighting bucks whose horns have gotten locked together.

The Dow represents the flower of American prosperity; gold is the age-old measure of value. The Dow is hope; gold is experience. The Dow is the future; gold is the past. The Dow is dreams; gold is reality.

Companies can create an almost unlimited amount of wealth; but there is only so much gold to measure it. So, in terms of gold, the price of the US’s top corporations (the Dow) goes up and down…but never strays too far from its long-term mean — around 10 ounces of gold to the Dow.

One century, six trades

Just go back to when the Fed was set up, in 1913. Imagine that you followed a simple rule: you bought stocks when the Dow traded for 5 ounces of gold, or less…and you sold your stocks and bought gold when the Dow sold for 15 ounces of gold or more.

Right off the bat, you would have taken your nest egg — say, US$100 — and bought stocks. They were trading at 4 ounces to the Dow in 1913. Then, they got even cheaper as the Second World War began. But you don’t have to read the news or study the claptrap put out by economists. You just stick with the system.

You sell your stocks and buy gold in 1929, when the Dow/gold ratio goes to more than 15…and buy back into stocks in 1932, when the ratio collapses to under five again.

The next move is a stock sale 27 years later, when the ratio crosses the 15 mark…followed by another buy in 1974. That is the beginning of another bull market. You stick with it until it reaches a Dow/gold ratio of 15. Then, you make your final move — selling out of stocks. You’ve been in gold ever since.

What? You missed the biggest bull market in history…from the depths of the mortgage finance crash in 2009 to today’s peaks. You also missed the glory years of the dotcom bubble — from 1996–2000. How could this be a good trade?

Well, after the dotcom crash…and the mortgage finance crash…the ratio never fell to our five target. So we never bought back into the stock market. We’ve been out of stocks for the last 26 years, patiently biding our time in gold.

And yet, with this trading system — with only six trades in the last 100 years — you would have turned 4 ounces of gold in 1913 into 17,773 ounces of gold today. Your original US$100 would now be worth about US$33 million.

The current Dow/gold ratio is 18. And by almost all other measures, US stocks are at an all-time high. Do you have your running shoes on yet?

Stay tuned...

Regards,

Bill Bonner,
For The Daily Reckoning Australia