Hello Tom,
I've read many of your articles in the past. Don't you think that real estate needs a substantial correction before rising again, especially given the gains made over the last few years? I live in Sydney (Australia) and our boom ended in 2003. Having said that, the correction so far has only been mild (about 15%). It is hardly the 1989-1991 scenario again of a sharp 25-30% drop. We're in a commodities boom and Australia is a major beneficiary, as reflected in the performance of our stock market.
However, I've always believed that excesses need to be purged before a new bull market can begin. In the case of RE, we've only had a small correction, which leads me to believe that the RE boom may not be over and that perhaps commodities will keep the economy buoyant. Without the stock market tumbling, I cannot see a crash on RE.
What worries me however the level of debt. Australia is worse that the US in the level of debt per capita. Our 10 year bond yields seem to follow the corresponding US 10 year bond yields (at least for the last 16 years) and I've noticed that the US yields have risen substantially recently. I'd tend to think that it would not take much of a rise in interest rates to really hurt home owners. Such action could well then lead to a recession.
In short, regarding your comment of 'Real estate and gold and most commodities will trend up but with negative interludes', I'm wondering whether a 'negative interlude' may arrive sooner rather than later - including the USA.
Regards
Michael
Thanks, Michael.
Both Australia and the UK have had residential real estate corrections, as you know, and we may have one starting in parts of the US. Residential real estate depends mostly upon very local factors. Our great home price increase in the past few years was a complex social event occasioned partly by "cocooning" after 9/11/2001 and the associated rapid drop in borrowing rates. However, it also occurred nearly at the exact bottom of the Kondratieff Wave itself.
With regard to Long Wave real estate investing, I really meant to refer more to commercial real estate, which also has local determinants, but where the economic situation is the primary factor for increases and decreases in values. Residential real estate can turn out to be a good investment, but in general it's best to think of it as "just home" for family and self. A person with a modest paid-for home, but who invests for the long term in stocks or other assets, will generally come out far ahead of some someone who leverages up a residence beyond his means as an "investment". Obviously some folks will at some times get lucky doing the latter, but luck isn't as controllable as other investments can be.
The concept of a "wipeout", or major debt and real estate disaster at the end of a Kondratieff down cycle, is NOT an integral part of Kondratieff's view nor my own. Such events "may occur" but are not necessary. All that is necessary is a 20-30 year decline in interest rates and prices followed by convincing rises in many price and growth data series.
That Long Wave "wipeout" concept in Kondratieff studies came from the so-called "liquidationists" in this country in the early 1930's. Andrew Mellon, who was President Hoover's Secretary of Treasury, was a vocal liquidationist. The idea arose that all "bad" investment had to be liquidated or destroyed so that "good" or intelligent investment could begin: this was often referred to as "creative destruction". The former Austrian imperial treasurer, Joseph Schumpeter, who became professor of economics at Harvard University after World War I, was a convincing champion of "liquidationism".
In my view "liquidationism" is a simplistic political slogan. Some particularly severe down cycles, like the one ending in ~1844, and in some parts of the 1929-1949 down cycle, are indeed severe liquidations. The recent one from the mid 1970's peak to 2002-2003 was not.
The Long Wave is an economic observation, not a political or philosophical system. Many would-be Long Wave analysts missed the whole down cycle of interest rates (and slowing growth), going from nearly 20% in 1980 to nearly 1% several years ago, because they needed to see "blood in the strees" and a major credit cataclysm. Many are still waiting for this "Second Coming", as did the early Christians, long after it's finished.
The hallmarks of the down cycle are decreasing crude (commodity) and finished goods prices, falling interest rates, and decreasing rates of growth and all such things which depend upon growth such as incomes. That is truly the "bottom line" of Kondratieff.
By the way, I have been enjoying the fruits of the Kondratieff rise by investing in BHP and in Rio Tinto for the past four years, both directly and through funds which own them. I suspect, barring some mistake or odd happenstance, that they and many other Australian investments will be good holdings for at least another 15 years.
Regards and allbest,
Tom Drake
Recent Comments