Property: Darkest before dawn
HOMER HOYT 18 YEARS THEORY
According to respondents consensus, they expect 2018 to mark a turning and recovery point for property market, but some people also worry political constellation during national and presidential election in late 2018 – mid 2019 will limit the movement of property recovery.
I can understand their various and different views since no one can exactly predict when the property market would recover again.
To get a better picture and an idea when we should expect property market to rebound again, I think we can learned it from “18 years property cycle theory” created by Homer Hoyt.
According to wikipedia, Homer Hoyt (1895–1984) was the first recorded pioneer of studying property cycles in 100 Years of Real Estate Values in Chicago (1933, reissued by Beard Books, 2000, ISBN 1-58798-016-9). It is widely recognised that property (along with other forms of investment) follows a predictable cycle every 18 years. The property cycle has three recognised recurring phases of boom, slump, and recovery. The cycle follows a consistent pattern which can be accurately assessed by following the trends of a collective basket of Key Drivers (as outlined below).
The property cycle follows a predictable pattern as sure as night follows day. This pattern reveals three distinct phases being Boom followed by Slump followed by Recovery before the next Boom commences etc. The property cycle (unimpeded) will always follows this pattern so a Boom cannot precede another Boom without first experiencing a Slump followed by a Recovery before the next Boom can arrive. The property cycle must have a ‘free market’ where property ownership is attainable by citizens without, significant government restrictions on ownership or, any form of monopoly.
The following is an overview only of some of the elements evident in each of the property cycles phases.
1. BOOM
When the Boom phase commences most people fail to believe the Boom will last and think it is just a short term anomaly because they do not have the context of understanding the property cycle.
What is observed during the Boom phase includes:
- Rents rise to levels which place significant financial pressure on tenants
- The time it takes for a property to sell after being listed for sale reduces markedly
- Property prices rise (happened)
- Yields fall as prices rise proportionally more than rents rise
- There are few mortgagee/forced sales
- Property finance is easy to obtain and there are a number of new lending products making borrowing easier
- People borrow against their increased house values and spend this money on consumer items (TVs, boats, holidays, cars, etc.)
- There are many property seminars competing for investor dollars (happened)
Property is a hot topic in the media. Initially there is much speculation about how price growth will continue, but later in the Boom the media turns its attention to the reduced affordability of property.
There is a lot of discussion about how this Boom will never end i.e. “it is different this time” and expectations that there will be no subsequent slump phase.
2. SLUMP ( WE ARE HERE )
The Slump phase typically commences a lengthy period of time (often years) before most people realise the property market is in the Slump phase, as there is a delay between the shifting trends of the “Key Drivers” and the impacts that are evidenced in the property market. The slump is usually the longest phase in the property cycle. The longer and bigger the preceding Boom, the longer and harder the subsequent Slump is likely to be. In contrast to popular opinion property values do not necessarily fall during a Slump, values may simply stall for a lengthy period.
What is observed during the Slump phase includes: (red and bold is happening now)
- Increased vacancies of rental properties
- Reduced cash flow for investors
- Property price growth stagnates and/or property values fall
- The length of time to sell a property increases markedly
- Increased number of mortgagee/forced sales
- Property finance is more difficult to obtain
- There is much “doom and gloom” about property values being too high in the media
- Many property investors experience lower cash flow and sell down their property portfolios to some degree, or completely.
3. RECOVERY
The recovery phase is always much shorter than the slump or boom phases.
What is observed during the Recovery phase includes:
- Increased rents and cash flows
- The length of time to sell a property reduces
- Property prices begin to increase
- Much confusion in the media reigns about whether recent property value growth is sustainable
- Many potential property purchasers delay buying because they evidenced value falls or a slow market in the preceding slump.
- The cycle continues
When you look at the Homer Hoyt theory and company guidance , we can conclude that property market are currently in a period of slump. Hoyt himself said this “slump” period is usually the longest period in property cycle (the boom was happened in 2010-2014, thus we see there is a big possibility that Indonesia property market’s complete recovery / next boom would take sometime around 2H 2019 which coincidentally also mark a period post Indonesia presidential election.
Before entering the next boom period, we think Indonesia property market must first sail through oversupply waves, waiting for people who are highly leveraged wiped out (just like in stocks market), so massive supply could be reduced, the rebalancing process is underway, price pressure will slowly but sure disappeared.
After price pressure disappears, we just need a buyer to push it up, and I think current millenials generations (born in 1981-1997) are the ones who will push property prices up in the next boom. But, first let us hear their latest situation and their views about current property price at Serpong.
MILLENIALS COMING TO RESCUE ?
I surveyed around 20 fresh graduates (age 22-25 years old) around Serpong area and found that 80% said their salary is still below Rp 10 Million per months, 15% said their salary is now at Rp 10 Million – 15 Million / month, only 5% (1 respondent) has salary above Rp 15 Million / month.
When I asked them about their opinions about property price at Serpong, most of them said it’s quite expensive and they are not sure whether they can buy it even with bank loans since most banks has a rule that your maximum installment payment / month is 1/3 of monthly salary. They hope their parents would help them to afford buy a property asset and they also tried to start an online business at instagram, like selling a bag, shirt, dress, painting, accessories. Others stated they will open a coffee shop since it is a cool thing tp do now
I ran a simulation with property calculator, assuming 20% down payment, 8.25% fix rate at first 3 years, 11,5% floating rate for the next 15 years, and property value Rp 1.000.000.000
When I showed this calculation to them, many of them smile with a big grind and gave me a various responses
“ Oh My God !!!!” then bowed down his head (maybe he was praying ?)
“ How could I marry my girlfriend ? ” (I honestly don’t know)
“ I should tell my fiance to work hard !” (somebody might not sleep well tonight !)
“ easy, daddy mommy will help me” (lucky you bro)
“ yikes, time to eat instant noodle for breakfast, lunch, and dinner.” (bullish news for Indofood , BUY INDF ICBP !)
and many more
Personally, I think only people who currently earn more than Rp 15 millions / month who can afford bought a property above Rp 1 billion for the next 1-3 years by taking a bank loan, assuming their salary is grow around 10% a year + 1 month bonus.
Banks seems understand this condition and from what I heard just a few days ago, one of the biggest and maybe the most prominent bank in Indonesia is now opening a possibility for people who has salary > Rp 10 million / month to take a loan with maximum monthly installment 75% of their salary vs 30-33% of salary previously.
Aside from that, we think stronger economic growth and salary increases in the next 2-3 years are expected to prompted middle up class income to be able catch up with property prices (at least the smaller ones), so we will see increasing demand with balanced supply, then the property market could enter a new booming era.