Property Advisory and Research

Secret Agent advises individuals, institutions and family offices on property matters.

Australia is in the throes of the unravelling of a domestic financial cycle which spans 30 years (1992–closing). The current financial cycle is a credit boom that has mostly formed in the residential real estate sphere. The definition of a financial cycle is only loosely agreed upon; this is their challenge, but it is also their strength. However, some of the agreed-upon defining characteristics of a financial cycle are that: it involves an internal domestic credit boom, mainly focused on real estate; it is long in duration; and it is commonly more than double the usual business cycle of 8–10 years. During this time, memories of past busts recede from view and market participants and policymakers presume the cycle is now tamed. The financial cycle is set off by a real economic boom and features strong interplay between rising property values and collateral, rapid credit expansion, and the banking system. Credit constraints are dismantled during the early stages of the cycle, and risk taking grows alongside that of the cycle, which adds to the length of the cycle. Financial cycles transform the economy, including the nature of employment, and go hand-in-hand with construction and infrastructure booms, which in turn skew government revenues, thereby creating contingent liabilities in the process. The financial cycles of different countries operate at different frequencies — however, major trading partner countries can have cycles which are linked.

The starting point for understanding the financial cycle is to accept that the boom must make way for the bust. The future bust is encoded into the genome of the financial expansion before the upswing gets underway. Think endogenous qualities over exogenous ones. The ending of the usual domestic or global business cycle, or even the global financial cycle — which can often be in sync — or the economic decline of a major trading partner are factors that commonly help bring about the end of the domestic financial cycle. It is here that the worst effects are experienced. Most commonly, the banking system comes under great stress, marking the end of the cycle, and a domestic financial crisis, either mild or severe, can ensue. The cause and result are heavy falls in property values and a long de-leveraging process, including debt write-downs and insolvencies, resulting in a slow recovery. Financial cycles can span multiple economic contractions, making them hard to detect.