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Is the crash really coming? Some say the 18. 6-year cycle tells us it's happening in 2026. Others have been yelling crash over the past few decades. So, is it time for the Australian property market to crash?
Or is the data supporting the crash theory unfounded? In this episode, I'm going to unpack the relevance of the data, local context versus global context, and theory versus reality. It's time to really understand what the data says about the crash coming in 2026. I'm Junge Ma, a senior research analyst at InvestorKit. Let's get into it.
So, what exactly is the 18. 6-year cycle? This theory was developed by Phil Anderson, suggesting that real estate markets follow a pattern of 14 years of growth followed by four years of downturn. It was developed based on the financial and real estate market in the US. But does it apply to Australia's property market?
The short answer is no. And it is important for you to understand why. So first, we want to check the relevance of the data. The theory was developed based on the 19th to 20th century historic data. That was pre-globalization, pre-internet, pre-AI.
Things were moving so much more slowly than today. And economically, governments didn't have policy regimes such as inflation targeting. But today's market is fueled by technology, global capital flows, and policy interventions. It doesn't make much sense to assume that a pattern found based on 200 years old of data would be still working today. Actually, just by looking at what happened in the US real estate market in the last 30 years of the 20th century, it's already showing that that pattern is not really working well anymore.
So in this chart, they have noted three peaks, 1973, 1989, and 2006 to 2007. On the surface, it looks like that it is still following the pattern. But just take a closer look. It's not really. For example, in 1979, there is another peak, but it's not annotated equally as the other peaks.
Why? It's because it's out of pattern. Pointing that out might jeopardize his own theory. And the latest downturn from 2006 to 2011-12, that was not a four-year downturn as well. So it's not actually following that pattern really well.
And secondly, we want to consider the difference between local context and global context. The US does have a global impact, but that impact is more pronounced in the financial market, for example, the stock market. But property markets are quite localized. Supply and demand are more influenced by localized context, such as interest rates, migration trends, construction activities, and so on, and less influenced by the US trends. For example, Australia has our own ecosystem.
Our largest cities, Sydney and Melbourne, their housing markets are heavily influenced by interest rates, immigration trends, and foreign investment interests. And in smaller cities such as Brisbane and Perth, economy and housing markets are more influenced by commodity prices, especially iron ore and coal prices. The chart on the screen now is showing how house prices have been trending over the past 20 years. Sydney and Brisbane had a price boom following the 2008 rate drop. And after a correction from 2011 to 2012, there's another prolonged boom from 2012 to 2017, approximately.
Then in 2020 to 2022, we have this COVID property boom. Are they following the 18. 6-year cycle? I don't think so. And if we look at Brisbane and Perth, house prices peaked in around 2011, 2012.
Then there's a prolonged period of nearly no growth. And then the next boom happened in 2020 to 2022. Are they following the 18. 6-year cycle? I don't think so either.
And now the third thing to consider is the difference between a theory and the reality. Any cycle theory is at best a pattern identified based on historic data, but a pattern doesn't mean it's a law. When we look at the history, we like to summarize things into patterns because that simplifies things, making it easier to learn and remember. And most importantly, it gives us a sense of certainty. And as human, we love certainty.
But if we are looking at the future, it's actually the opposite. It's full of uncertainty. And the probability of a market repeating its previous cycle is actually extremely low. So when we predict the future, it's important to consider or to take into account as many variables as we can instead of oversimplifying things. So what should investors do instead?
Instead of being paralyzed by the fear of a theoretical cycle, we want to focus on data and the fundamentals. We want to track supply and demand balance. For example, in the rental market, we want to check vacancy rate. In the sales market, we want to check inventory levels. And overall, we want to check population growth versus incoming supply.
And we want to watch affordability and interest rate trends and how they would affect the supply and demand dynamics in each property market. And most importantly, we want to build portfolios that are resilient. We want diversity. We want the balance between cash flow and capital growth. And we want to build our portfolios in markets that have long-term strong fundamentals.
So in short, this 18. 6-year cycle doesn't work, at least not in Australia. Make sure you make your decisions based on evidence instead of fear. I'm Junge Ma, the Senior Research Analyst at InvestorKit. I'll see you next time.
