Tuesday, 5 January 2010

The Burj Dubai and Real Estate Cycles

The Burj Dubai has been all over the press in the past couple of days as it had its grand opening. What an engineering spectacle! The tallest building in the world at over 800 metres tall with more than 160 stories and a luxury hotel designed by Giorgio Armani. So what do I think? I think of a great book entitled “The Secret Life of Real Estate : How it moves and why” by Phillip Anderson which states that “the world’s tallest buildings have a consistent habit of being completed right at the top of the real estate cycle ... producing for us – at least so far – the most reliable indicator of an approaching peak”.

Anderson also suggests a 24 Hour Real Estate Clock where hours 1 to 16 take approximately 14 years during which time property values rise reaching a peak and then hours 17 to 24 takes approximately 4 years during which time property values fall. I'll work through an example using a dataset that I’m closely following – raw (not adjusted for inflation) Nationwide UK Historical House Price shown in the chart above.

Anderson suggests that from the previous cycles low, the first 7 years will see property increase in price before a mid cycle recession. Using the Nationwide figures I'll call the low November 1992 and I'll call the recession start April 2000 which is 7 years and 6 months. During this period property increased in value by an average 6.5% per annum. So that fits.

I'll suggest using the Nationwide figures that there was a 6 month mid cycle recession during which time property increases slowed considerably and rose by 1.62% over that 6 months. Still positive as inflation for that 6 months was 0.9%. So that fits.

There is then a second 7 year cycle (completing the first 16 hours of the 24 hour clock) which starts from the onset of the mid cycle recession. During this second cycle property increases at a greater rate than during the first cycle. I'll call this peak October 2007 which is 7 years and 6 months. During this period property increased in value by an average 11.9% as predicted by the Anderson model. So that fits.

Now the fun begins with the 'Keynes crash phase' which runs for 4 years. Using this model we should come back and look at property in October 2011. What are highlights of this cycle - foreclosures and bankruptcies increase (yes!), stocks enter a bear market from past highs (yes!), credit creation institutions reverse policies (yes!), economic activity stalls (started but then QE began, I think we may still be here), wipe out of debts/stagnation (still needs to occur), wreckage is cleared away (still needs to occur) and finally stocks start climbing (they have but was it caused by QE and we are in for another big drop?) then the 18 year cycle can begin again.

As I’ve detailed previously I am yet to buy myself a flat or house. The above indicates that maybe I won’t get the opportunity until late 2011 or so...

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