Property price growth target by 2029

Posted by Gavin Chau

Once again, I must preface this with the aphorism that “all models are wrong, but some are useful,” meaning that statistical models usually can’t replicate real life with all its inconsistencies and variances in human behaviour. Having said that, even if we can’t describe reality, models can be useful if the fit is close enough.

One thing that never ceases to amaze me is how similar patterns (known as fractals) can be for different assets over different times. For example, the price action of gold in the 1970s closely mirrors bitcoin in 2017. Keep in mind these are different assets in vastly different economic conditions being purchased by different people in different generations. Exactly why these patterns play out repeatedly is a mystery, but with the graphs effectively being a real-time barometer of greed and fear, they are probably an indication that human nature hasn’t changed much over time.

With that in mind, let’s have a closer look at the timing and average returns of the last four property cycles. Immediately we can see that there is a pattern of similar fractals. This allows us to speculate on when the market will likely peak and what returns we’re likely to achieve. For the sake of simplicity, we will just focus on the Sydney market in this article.

The three phases of a Property Cycle?

If we look at the diagram below, we can see that the property cycle can be split into three distinct phases. An early run-up period lasting four to seven years. A mid-cycle slowdown before a final run to the cyclical peak and blow-off top lasting from three to six and a half years. This is followed by a period of consolidation lasting four to five years before the cycle starts again.

One thing to note is that the property cycles seem to be getting shorter over time, with the cycles running for 18, 16, 13, and 12 years respectively. If we run a logarithmic regression over these figures to come up with a projection for how long the next cycle is likely to last, it comes up with 10.75 years. With the peak of the cycle being 8.5 years from 2021. If the market continues to respect this trend, we are likely to see a peak in Sydney around 2029.

So how much growth are we likely to see by 2029?

There are several ways we could interpret these cycles but again, for the sake of simplicity, we’ll just take the measured move from trough to trough. We get the following results:

Cycle 1: 110%
Cycle 2: 56.7%
Cycle 3: 87%
Cycle 4: 133%

The average growth over the course of a property cycle is 96.77%. In other words, property prices roughly double over the course of a cycle. By implication, as long as house prices continue to follow this cycle that has held true for the last 61 years, we would likely see property double in the next seven to eight years.

While the macro environment looks scary, this is my favourite time in the cycle. One thing that we as investors all suffer from is recency bias, where we tend to give more weighting to recent events rather than historical ones. When the market is at its peak, people always think it will go higher, and when they’re at the bottom, people always think it will go lower. With property prices having fallen off their recent highs having the courage to go against the herd is likely to pay off in the long run.

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Posted by Gavin Chau, on 19th Sep 2022