I must hand it to the 18.6-year Real Estate Cycle. It never fails to deliver.
There is always something that comes along to keep things turning and on track.
I believe I have found yet another piece of evidence that validates this view.
It was via an article I read recently.
It points to a massive global trend, even though the article was published in the Australian Financial Review.
It is going to be a very important development for both the home construction industry – which in the last 18 months – has struggled to come to terms with the tight money conditions.
And it’s the sort of development I have been looking out for as a sign of what might drive things towards the peak. Because this is a potentially vital clue as to the way this current cycle is evolving relative to those that came before.
It’s happening on the ground here in Australia where I am writing this, and it is going on all around the world right now.
And the questions for you are: should you get involved as a customer?
And should you be keenly following this development for clues as to when the peak then bust of the current cycle is due to commence?
Believe me, this development I’ll cover today is here to stay.
And it will be a seismic shift in how new homes are developed and built.
But at what cost?
Let’s find out.
Is this really the forgotten factor?
Some interesting news emerged here in Australia.
It could provide us some clues as to how the current housing crisis in places like Australia, the US, and elsewhere can be solved.
Below is the article I will focus on today.
Source – AFR.
Now, I have my own thoughts when it pertains to what the “forgotten factor” is in regards the housing crisis. It’s the entire reason that the Property Sharemarket Economics (PSE) business exists in the first place.
But I digress.
From the above article.
Don Mullen might be the world’s biggest housing investor. The founder of New York-based alternative asset manager Pretium, which is exclusively focused on residential property, has $US51 billion ($78 billon) under management and is the largest owner of single-family homes in the US.
So, he’s well-placed to deliver a blunt assessment of what’s coming as housing crises in Western economies worsen.
“I think the pressure on democracies will be extraordinary over the course of the next couple of years to come up with a more aggressive solution,” Mullen says.
I do agree that this is one individual who has a point of view and a breadth of experience when it comes to residential housing few on earth can match.
I also know he has a vested interest in what he’s saying here too. It appears that Mullen was in Australia recently to speak to potential investors. Why?
Because the guy smells a lucrative opportunity here. He wasn’t shy in explaining precisely what that was either.
The longstanding lack of supply in the US has created the opportunity for Pretium (and other alternative asset managers) to “institutionalise” parts of the US residential housing market.
It buys single family homes to rent out, originates mortgages, buys distressed residential property loans, and funds home builders in various ways.
Please note that this shortage has been present in the US since 2007, possibly earlier than that.
Currently, it is estimated that the US is almost 5 million homes short of demand for a country of more than 300 million.
Mullen has clearly seen the latest projections for Australia – potentially one million homes short of demand – has been even greater as the population pool here is only 28 million.
“All those things (stated above) say there needs to be some new policy,” he says. “I am not arguing for government policies. I think bringing more institutional capital into the marketplace has been and can be a positive.”
Here is one of the reasons why he is calling for this policy change. It’s a very interesting point of view.
Mullen contends that the combination of the decrease in new home building plus the impact of longevity – homeowners living longer, and remaining in their homes until they are 75, rather than 60 as they did 30 years ago – has largely been ignored.
For the US, this means 30-year fixed mortgages are a disincentive for existing owners to leave and need to finance at a higher interest rate.
For Australians, most existing homeowners who owe zero on their properties are retired. Here, our tax system disincentivizes downsizing and so most stay put.
His solution? To institutionalise parts of the US and Australian residential housing market. Similar things are also going on in the UK and parts of Europe too.
How the current real estate cycle is evolving.
“Institutionalising the market” means creating a new asset class that is large enough for large investors – think major investment funds, pension funds and the like – to invest into.
For that to happen it needs to involve large scale, a flow of income that is stable and sustainable, professional management and so on.
In the housing market this is part of the build-to-rent trend that is appearing across more and more global residential markets.
Pretium’s business started in the ashes of the previous real estate cycle bust that saw large swathes of residential real estate being sold for pennies on the dollar.
Mullen began by treating housing like derivatives, building a digital model that scanned 20 US housing markets every 30 minutes for well-located single-family homes that could be renovated and rented out. Now, this fact is interesting.
Why? Because it was something that, once I read it, made me think that perhaps this gentleman was learned in the timing of the 18.6-year Real Estate Cycle.
It was indeed the perfect time to be moving into the US residential market.
Fast forward to today and Pretium’s business model now specialises in buying in bulk from US home builders; by committing to buy homes before they are built and grabbing unwanted inventory from these large groups, Pretium secures good deals and reduces the builders’ risk.
You can see why such a model would be attractive to the remaining home builders in Australia.
We haven’t, though, spoken about one crucial aspect that’s missing here. And that’s credit.
Since the Silicon Valley Bank (SVB) fiasco in March this year, we have seen across many US regional banks (the traditional supplier of residential mortgages) a consolidation as the rapid interest rate rise campaign of the US Federal Reserve really began to bite.
Now, you may think that they alone will be the ones providing the lending both to the home builders and the eventual buyers of those homes in the form of long-term mortgages.
Not so.
Of the $360 billion of lending to the sector each year, Mullen estimates about $180 billion will shift from banks to private markets in the coming years, including stepping in to replace regional banks as the key funders of small home builders.
If true, this is a stark demonstration of how this particular real estate cycle is evolving.
Yes, we are seeing, right on time, the credit spigots slowly being forced open. However, it’s possible that it isn’t just the banks that provide it.
A combination of bank and private lending via the likes of Pretium.
Makes me wonder what will break first once the land market has peaked then turns to bust later this decade.
It could be a vital clue to time the end of the cycle if we can identify it early enough.
What you don’t know CAN hurt you!
Now, there is for me a significant caveat you need to be aware of here.
Yes, the imminent arrival of a A$80 billion private residential developer from the US into the Australian market is bullish for the land market here over the next few years.
And a potential lifeline for those home construction companies who are still left standing.
But if, like I suggested, Mullen is across the timing of the 18.6-year Real Estate Cycle, then what he explained further into the article caused me some concern that in fact he doesn’t know his land history.
While there are growing concerns that a blow-up in private credit could be on the cards as the industry booms, Mullen is more sanguine, arguing the banks are levered 10 times (down from 25 times in the GFC), while private credit is levered once.
“Can there be a mess [in the private credit sector]? Yes. Will there be a systemic mess? Highly unlikely,” he says.
The regulation forcing banks to hold more capital and lend less is “creating a new asset class for alternative asset managers. So, there’s absolutely no doubt the cost of capital is going to go up. But the risk to the system is going down.”
Really!
Mullen was speaking at the UBS Australasia conference this week, is it possible that no-one called out the contradictions in this response?
If you’re increasing both bank and private lending under the belief the systemic risk is falling at the same time, do you not think that the upcoming land market peak then bust will see this violently unravel very quickly?
No-one who truly understood the real estate cycle could make such a claim given the historical precedence of the absolute opposite happening to what Mullen is preaching a few years from now.
And so, I’m worried. Really worried. Because the extent of the carnage unleashed by the real estate bust is predicated upon how much credit is created and lent against real estate speculation.
And it now seems that Pretium is one of many future global residential ‘build-to-rent’ businesses who will fight for market share both in the US, Australia, and the UK.
Folks, you need to be across developments like this so late in the cycle. Because their performance a few years from now could be critical to determining the actual land market peak.
Plus, you could be directly affected if you purchase their products.
You don’t need the hubris of a successful (but real estate cycle ignorant) CEO to guide your investment decisions, what you need more than ever today is this: a membership of the Boom Bust Bulletin (BBB).
Give me the opportunity to take you in depth into the cycle.
Learn about the history of both the 18.6-year Real Estate Cycle and the real reasons why interest rate rises, house prices, and stock markets are so indelibly linked.
It will teach you how to decipher the news that we get bombarded with every day to focus solely on what truly matters.
No more negativity and noise, just the science of the economic rent and the timing inherent in the real estate cycle.
This is all you need to succeed.
Time for you to prepare is now at a premium. I’ve outlined today yet another cog in the ever-expanding wheel of the current real estate cycle. This cycle is turning as expected.
From peak to bust, this cycle is very much going to affect you. Whether you are aware of its existence or not. And these developments are simply adding further fuel to the greatest wealth creation event in history.
You cannot afford to be on the wrong side of this trend. Knowledge applied at the correct time is the key to your financial success now.
That’s how the BBB can help.
As a Boom Bust Bulletin member you will receive 12 monthly editions a year detailing all the key turning points of the cycle, a deep dive into the most important markets across the globe and ways that you can personally benefit from this knowledge.
All derived from our unique and proprietary research – which you’ll not find anywhere else.
Plus, you’ll receive exclusive invites to BBB member-only webinars when we run them.
All this for just US $4 a month, less than a takeaway coffee.
Best wishes,
Darren J Wilson
and your Property Sharemarket Economics Team
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