I recently met with an acquaintance who spends his time investing in share markets around the world. The conversation centered around trends analysis, specifically longer term trends both for property and investment markets.
Given my knowledge and close following of particularly property and share markets for many years, I was a bit taken back but not surprised of the trend that is currently in play around the world as described by him.
What I’m about to report will definitely shock many investors and cause enough angst to declare it a load of rubbish, or words to that effect.
His prediction on the property trend is staggering and by the way, this is not just a single person skewing figures to suit, this is analysis from some of the best in the business.
We are currently into the 3rd year of a 33 year property market correction.
Gulp! – yes 33 years seems rather excessive but let me explain.
We’re not talking about a 33 year decline across the board. There will be definite peaks and troughs in certain sectors and types of property investment.
For example, the relatively small towns of Emerald, Toowoomba and a number of others here in Queensland, Australia are booming mining towns with people flocking to invest in residential property which in turn are rented to the mining companies or directly to their staff.
However, it’s a totally different story down the road in Surfers Paradise. Tourism is at an all-time low, investment from international buyers has dried up and the cranes have long since been dismantled from the skyline as the commercial building market grinds to a halt. In fact, if it wasn’t for government infrastructure including schools, a new hospital and a rapid transit rail link, the work for major construction companies may have completely disappeared.
There will be segments of the market that prosper while others take a huge hit.
Overall though, if you have followed your dream of property investment over the last 20-30 years and expect it to continue, you may be in for a rude awakening.
Unless you are well cashed up to withstand a medium term dip in a particular market segment or lucky enough to be able to pick the winners.
However, these days, if you don’t get the timing or the trend quite right it’s likely to mean no capital gain or a loss – in other words, the odds are no where near what they have been in the past.
If you are in your 50′s (heading into the last high earning years of your life) and you have all of your eggs in this one basket property is an especially tricky investment option.
A slight imperfection in your decision making could be a fatal slip that wipes out your family nest egg!
At the risk of sounding an absolute party crasher, I’m sorry to declare that the stock market is no better. Have a look at this graph below of the Dow Jones since 1900.
The last significant flat-lining occurred from 1965-1982, a period of 18 years.
The comparison with then, the depression years of the 1930’s and today is obvious.
We are already 11 years into a market correction.
If you marry that up with the price/earnings ratio graph, we can see that the market is certainly not at its potential bottom.
History shows bull markets go hand in hand with rising P/E ratios, but also that P/E ratios first have to become really, really cheap before they embark on a sustainable uptrend.
In other words: don’t hold your breath for the next sustainable uptrend, it simply is too early for that.
I believe there is a very strong observation to be made that may give us a clue to the future trends.
Even discounting the bounce back after the depression years, which clearly sparked a world war and then generated massive investment in rebuilding, major government hand-outs to get the economy back on its feet and no choice for the population other than to get out there and work. Importantly, there was no unemployment benefit and no superannuation for the population to fall back on.
The next downturn is far more interesting and I believe provides a significant reason for the trend. Apologies to all those millions of people in this age bracket, including myself, but it’s predominantly down to that proverbial ‘python in the pipeline’ baby boomer population.
I know, at this point in the conversation, the baby boomers will bleat and complain that they’re getting blamed for everything and, dare I say it, possibly rightly so!
You note the timing of the start of that 1965 correction. That would have made the youngest baby boomers 20 years old. They would have been in the workforce for 5 or 6 years, probably just got married, starting a family and were about to buy their first home.
It’s very obvious then that the last place they were going to invest their money would be in stocks. Payments on the mortgage and family costs wouldn’t allow for that option.
Wind the clock forward though and in 1982 it was looking pretty damn good. The mortgage was almost paid off, the kids were starting to leave home and they were asset rich with the price of real estate doubling every 5-7 years, sometimes faster. Added to the fact inflation was out of control meant that stocks were really starting to take off.
Share clubs started, mum’s, dad’s, brother’s, sister’s, son’s and daughters were all ploughing that extra cash into the share market. For myself, I had even borrowed money against the shares I had to start a business.
Expert investors were a dime a dozen, you could even ask the milkman!
Those same shares I borrowed against are still in the bottom draw as an historical reminder of the 1987 crash. What a disaster, we thought at the time, but it was a just a small blip in the ongoing share market bull run right up until 2000.
Baby boomers continued to poor their money into shares, funds and disproportionately property.
Now let’s wind the clock forward to today’s scenario with the baby boomer population starting to hit 65 years old and the first of them beginning to look at retirement.
The sea change has started, the caution flag has been hoisted and people en mass have begun shoring up their retirement nest egg and pulling funds from the riskiest investments.
How long will this last?
My prediction, about 20 years!
It’s not as long as that 33 year property correction but still a long time – in fact, a bit more than an entire generation. Not surprisingly, it will almost exactly match that previous flat lining of the Dow from 1965 to 1982.
The key to this knowledge, as is always the case, is to look for the opportunities. But that’s another whole new blog.
Jim Rohn, one of the most respected motivational ‘gurus’ that I’ve had the pleasure to listen to once said:
“I’ll tell you what will happen for the next 10 years. It will be the same as the previous 10 years, spring will follow winter, markets will go up and come down”
The one prediction I can make is that Jim will be right again. Our challenge is picking the investment cycle and vehicle that best anticipates our maximum return.
What’s the way out?
Thats another blog – watch this space!