Can the GFC help us understand what to expect this time around?
Ok, in my last piece, I showed you what actually happened to Australian property prices during the GFC.
Long story short, property prices immediately after the GFC followed a classic sentiment cycle. Prices fell as fear gripped the market, and then rebounded as confidence returned.
And the point to note is that even though the immediate falls were pretty tame (just 5% peak to trough), that opened the way for over-sized gains as the market returned to trend.
Nationally, prices jumped 20% in 18 months. In some markets it was double that.
So these are what I’m calling the “first phase” opportunities. The sentiment cycle creates some large swings around the fundamentals, and if you’re positioned well, you can capitalise on that.
But these are just the first phase opportunities.
There are also the second phase opportunities.
The second phase opportunities happen after the new fundamentals have a chance to assert themselves.
What are the new fundamentals? Well, after the GFC it was super cheap money – lower interest rates and money printing around the world.
(It’s exactly the same this time around – the only difference is that now Australia has joined the money-printing party too!)
And so what happened to Australian property prices during the second phase after the GFC?
You can see that after the wobble in the first phase, property prices continued growing strongly.
Strongly is probably an understatement. They boomed.
From trough to peak, national property prices increased a whopping 70%.
A house worth $500,000 in 2008 was worth $750,000 in 2018 – an equity gain of $350,000.
And again, that’s the national average. In some markets it was easily double that.
In part this was driven by the mining boom, but mostly this is a cheap-money story. It’s about super low interest rates in Australia, and tidal waves of money sloshing around the global economy.
And this is the thing to note about these second phase fundamentals – they take a while to kick into gear.
People aren’t going to buy anything in the first phase of a crisis – it doesn’t matter how cheap interest rates are.
In the first phase, fear is everything.
But after the fear passes, the fundamentals have a chance to assert themselves.
And this is exactly what we’ll see this time around.
The numbers won’t be the same. The durations won’t be the same either.
But the dynamic will be the same.
In the first phase, fear and confidence will drive the market.
In the second phase, cheap money and money-printing will drive the market.
How far remains to be seen.
But this is what’s in play right now.
History doesn’t always repeat. But it certainly rhymes.