The Cycle of Market Emotions

Markets tend to move in cycles, and market sentiment, from optimism to Euphoria to panic to capitulation and back to hope again.
Source below





Right now Sydney and Melbourne are somewhere between “thrill” and “Euphoria”.

 

My 2 cents....

Sydney is somewhere between Euphoria and Anxiety
Perth is somewhere between Capitulation and Despondency
Melbourne is between Excitement and Euphoria depending on what part you are
Brisbane is between Optimism and Excitement
Adelaide is at Optimism

 

OK, going to be interesting to see what others think?

 

This is similar to the typical "anatomy of a bubble" diagram. If you study financial bubbles of all kinds (stocks, commodities, property what have you), they do tend to follow that anatomy remarkably closely. Bubbles are basically self-limiting as there always comes a point where the fundamentals that allow new buyers to enter the market (and purchase the bubbly asset, giving the previous owner their profit) are too overstretched.

Either would-be buyers/investors can't borrow, or rates rise, or wages don't grow, or supply overtakes demand - and these things mean the profits investors hoped for (mainly the recent, inexperienced kind who buy close to the peak for the highest price at the greatest risk) do not eventuate, forcing them to sell - which exacerbates the supply problem, hurts the economy etc. It's basically sort of feedback loop that grew the bubble, only in reverse. Once people start selling, prices come down, and more sell.

Bubbles are extremely interesting from a psychology standpoint.

I agree Sydney is approaching anxiety, and I think it's likely in for a correction. Melbourne? I feel like it's still got a way to go despite its oversupply. Brisbane and Adelaide it's hard to say - they really aren't as bubbly as many parts of the country.

 

Interesting, I like to look at the psychology behind it too, because there comes a stage where Inbelieve greed can overtake logic

 

at any given time in the s curve above, it can break away and spike above, crash down, or flatline - all deviations from the graph. That is when greed/fear/etc overtakes logic...and investors eg stock market analysts look for those abnormalities and advise buy/sell/hold accordingly.
However, if a long term ( even multi cycle) view is taken, it usually conforms to the s curve above.
Of course, this graph is applicable for most types of investments- gold, shares, property etc.

 

Wow, am I smart!

 

Birth of Jesus Christ

Out break of Second World War

Man lands on the moon

Death of Somersoft

Start of Propertychat

 

I saw a report the other day by "L F Economics" talking about a long term ongoing down trend for Perth housing.

I thought the report was a bit light on - but the whole "despair" and "panic" signals are starting?

 

Sydney is somewhere between Euphoria and Anxiety.
Perth is somewhere between Capitulation and Max Op.
Melbourne is between I am smart and Euphoria.
Brisbane is between Optimism and Excitement
Adelaide is at Optimism

Some others

Central Coast to Newcastle seems between I am smart and Euphoria too
Some inland Regionals NSW seem between Optimism and Excitement depending on where

 

And where is Sydney ?

 

Correction..
Brisbane is at the 'boom inevitable' phase on the curve.

 

Can't see that in the chart.

 

Harder to tell is how long the market moves from one phase to the other though. Sydney feels like it is due for a correction but I have probably been thinking that since 2015!

@MTR you have mentioned about buying and developing in growing markets before. How do you tell when the growth phase is still worth going in and when it is time to back off?

 

Psychology wise "despair" is the counterpart of "euphoria" in market behaviour - in a bubble you begin with a long natural boom phase driven by fundamentals aligning well. During that phase, good investors are usually doing well. Housing (or the relevant asset/commodity/whatever) is expensive but people are buying based on decent fundamentals - supply, demand (population), incomes etc. Euphoria is the phase where people - typically large numbers of very inexperienced investors - start buying not out of any real knowledge of the market, but indiscriminately. This manic buying phase involves a lot of jumping on the proverbial bandwagon, without any real examination of where that bandwagon might be going. Euphoria is a time for strong gains, but it's also a time marred by excess and stupidity - people buying into what is clearly an expensive, slowing, bloated market. Fundamentals are left far behind in the dust - and at this stage too many people buy in only on the expectation of lazy, easy profits.

Despair is the same thing in reverse. It's the point where, after a natural, inevitable slowdown, those hordes of inexperienced investors panic.

Ireland's anatomy went like this:

mid-90s to early 2000s - natural boom driven by booming economy, population growth, wage rises - price growth high, gains impressive.

around 2002-2005 - euphoria phase - despite slowly stalling economy, population growth, low income growth, emerging oversupply investors continue to buy in droves. Everyone seems to have an investment property or several. Investment is suddenly no longer the realm of people who've paid the slightest bit of attention to the market or to what they're doing. Price growth ridiculous. Gains extreme.

2005-2006 - peak. Market stalling, though there is widespread denial of this - particularly given frequent predictions of an upcoming crash every year until now. Price growth sharply down, but "still growing". Wages flat, population growth low, economy struggling.

2007 - "soft landing". The smart money starts to notice shaky ground, some begin to consolidate portfolios, or sell dead-weights. Developers begin going bust as apartments and fringe suburbs fail to sell. Rates start rising. Economy struggles more. Banks clam up. Slight price falls.

2008 - prices down about 10%, though much more in some parts (e.g. new city fringe developments, which really led the collapse). This was definitely the denial point. Most experts continue to predict growth, "never a better time to buy" etc.

2009 - despair. The inexperienced investors, many of whom failed or refused to see evidence of a slowdown, start selling en masse. Prices drop 20-30% this year.

2010 - bargain time, woop woop. At this point, quality detached family homes are fetching high rental yields as much of the oversupply had been "taken out of the market" (in some cases by being bulldozed, but also by projects folding, some becoming derelict, many becoming simply undesirable). Good homes begin to attract high demand, because by this point inflation is rekindling, the economy is growing green shoots, families want homes and banks have licked their wounds. If you owned a quality home and lost out during the crash, you're probably still a little down, but solid rental growth kept many afloat.

2012/2013 - entire market bottoms, prices begin rising across the board. Quality homes begin rising rapidly.

2014-2016 - prices are by now up 20-30% across the board, most quality detached homes in desirable areas have returned to previous values or have made gains.

Anyhow... I don't know where Australia's markets are sitting, but I personally find fringe suburbia and other new development is a good canary in the coal mine. If fringe suburbs and new apartments are just sitting on the market, there's a big problem.

 

It was a tl;dr post. But this ^^^ sums it up.

 

Show me a graph that's peaks and troughs aren't driven by fundamentals (supply-demand/inflation/population-wage growth/unemployment/government spending/taxes etc.)
How people feel is largely irrelevant in my eyes... but I get the concept none-the-less.
We must also remember the lion share of residential homes are in fact owned by owner occupiers, and a healthy percentage of these have zero debt.

 

Agree. I would say gold coast is also between optimism and excitement.

 

PS I pretty much always buy at the very low point of sentiment. It's been my key to making money and whilst hard the first time, it becomes easier and easier. Sometimes the hardest part is actually patience - is waiting for max sentiment to hit.