About
The Discipline to Wait
‘If you can see, look. If you can look, observe.’
José Saramago, Blindness, translated by Margaret Jull Costa.
Booms are difficult for someone with my disposition. I was born in a recession year, raised on tales from elders who lived through hard times, and founded the firm as the GFC was breaking out. The collapse of Lehman Brothers in the US on 15 September 2008 has been seared on my mind as to what can happen when optimism, unfettered speculation, low interest rates, and poor public policy combine to bring chaos to overvalued property markets built on speculation.
I have always believed in having a ‘buffer’ should things not pan out as planned. There are certain times when property markets operate without any buffer whatsoever. The mind of the people within them changes and they do not see any possibility of loss.
Since I founded Secret Agent, the Australian property market has been in a state of perpetual boom. To be fair, there have been bursts of good value in between. The GFC was one period in 2008. As were moments during the European debt crisis in 2010–2012. The Royal Commission into the Australian banking sector tamed the property market in 2018 and 2019. And as interest rates began their sharp rise in 2022, commercial property values started to become more attractive again, and the quality of offerings improved, as did some parts of the residential property market. The residential market had remained the most robust property sector in the face of interest rate rises, but as I write this, the downturn has deepened. New pricing floors are yet to be found in the residential markets.
There are times when one cannot participate in the market, as things are simply too overheated. To be clear, there are very good acquisitions to be made even within a boom, but they are infrequent, and acquisitions can be poor ones. One must bide one’s time and wait for rationality to return. To ask for rationality to appear in full is perhaps too grand an ideal in property markets, but one must wait for it to return in sufficient measure to allow sound decisions to be made.
Secret Agent has faced this dilemma several times: the question of when to step away from providing services to those looking to acquire. I vividly remember office meetings and phone meetings in 2016 and 2017, as well as the latter part of 2020, 2021, and 2022, in which our firm had simply declined a brief. Not only did the usual metrics not look right across any of our measures of value, but there was something in the air back then that was uncomfortably euphoric. People had substantial FOMO; there was a sense that house prices would continue to climb. They would be priced out forever if they sat it out. The urgency to buy was causing bad decisions to flourish.
Secret Agent has always been ambidextrous in approach. In the leadup to the pandemic boom, we could always switch our focus to another specialty property area when one became overvalued. So, if the residential market was overvalued, we could focus on those clients looking to downsize. For investment, we could switch to the industrial property market for strong yields, or the commercial property market, such as the office market, especially in the earlier part of the 2010s. In this way, we were never beholden to any one sector when the numbers didn’t stack up.
It was incredibly hard to maintain this ambidextrous approach during the pandemic property boom, because all property sectors and markets were overvalued. Except for data centres and perhaps very small parts of individual sectors, value was off the table. One had to choose to participate wholeheartedly or wait for the boom to pass.
In 2020 and 2021, as the property market let rip and the state of Victoria was plunged into various lockdowns, I would go to the State Library of Victoria when able to do so (and where I’m writing this now) and undertake a study of the history of Australia’s numerous property booms. Our offices were mostly dormant, so it was good to be somewhere fresh, that had strong history in its bones.
The fruit from our withdrawal from many services at that time was an essay released in 2022: The Ending of Australia’s Financial Cycle. A question mark should have been added to the end of the essay title to dial down the tone, and in some sections, the essay stretches the theory too far. At the start of the essay, a model diagram shows the Financial Cycle as a theoretical concept. ‘All models are wrong, some are useful’ — George E.P. Box — was to be added as an epigraph, but wasn’t. I think this would have helped show it was an approximation. The essay nonetheless described an arc of events that we still seem to be going through.
‘This time is different’ is a powerful feeling when trends seem irreversible. We tend to be misdirected by shifting baselines — our view on any one thing is usually shaped by our lifespan’s experiences, which are short compared to history. Time is often misjudged because we draw comparisons across short, familiar intervals: decade to decade, or one financial year to the next. A long-term trend such as a three-decade fall in real interest rates is hard to perceive, so we clutch for other stories to tell us what will happen next. History can be the only thing that reminds us otherwise.
The media cycle and the public space are dominated by the ‘shortage of housing’ argument. Yet little discussed, if ever, is the long history of booms. If we consult the history books, we see that very similar dynamics to those of the present played out in the 1800s and the 1900s in Australia. Eerily similar arguments were made as to why property was expensive and how to solve a housing crisis. The financial variables — the build-up of debt, the state of global trade, real interest rates, the availability of credit — have had far less attention paid to them than construction volume and migration intake. When credit is really flowing and prices are accelerating, large amounts of borrowing always end up producing a blowback somewhere in the financial system. The scarcity of assets such as houses is usually created by the boom, not the other way around. The boom unravels because it must, and there is always a glut of property that follows.
One cold morning in the warmth of the State Library of Victoria, I came across the Tasmanian banker Charles Swanston.¹ One of the most prominent bankers of his era, Swanston had reach across most of the Australian colonies. He was skilled at drawing British investors toward higher-yielding Australian property lending, beyond the reach of English usury laws. He wrote to his investors regularly, with small variations, saying ‘In this colony there are only two modes of investing money, one is by mortgage on landed security and the other by investments in bank shares.’
I think about that quote from time to time. During the pandemic and before it, it was not far from a truism that in Australia, either speculating on property or owning bank shares, were the best ways to prosperity. Now that the cheap-money era is gone and alternatives to property have reasserted themselves, we may find that the best period for considered acquisition in Australian property still lies ahead — once the current pricing correction runs its course. And we may find that those simply wanting a home are able to do so without the speculation driving the price away from them.
Booms are never what they appear to be.
Booms infuse the public purse and leave the populace with a feeling of inevitability about them. The library I am writing this in had its foundation stone laid in 1854, as the Melbourne gold rush was cresting, the city’s property market was buoyant, and economic hard times were just about to take root. Princes Bridge — Melbourne’s crossing of the Yarra on Swanston Street — opened in 1888, the peak year of Melbourne’s Land Boom, a source of pride for Melburnians, yet quickly eclipsed by the 1893 economic crisis, a homegrown property crash that bled to the other colonies. Luckily, it has never happened again on quite that scale in Australia.
Recently, on a visit to another great library, the State Library of New South Wales, I was reviewing some business records of my great-grandfather. There was a letter from a valuation firm that had acted on a building he had acquired for his printing business in Sydney. He acquired it in the 1930s for half what it had been worth before the Depression struck in 1929. The Sydney Harbour Bridge itself had started construction in the early roaring twenties — a symbol of boom-era confidence — and upon its completion in 1932, the hard times had set in. The great infrastructure projects that occur around us often signal that, beneath the surface, things may not be all they seem.
Towards the end of Charles Swanston’s reign at the Derwent Bank, while still at the top of Australian high finance, he wrote, ‘I begin seriously to be afraid of a general bankruptcy. All kinds of property, whether stock, land or shares in companies are unsaleable except at ruinous prices. Land and stock are not worth half the value they were three years ago.’ The lesson to learn here is one should be wary of being ‘all in’ during good times. If only Swanston had been more patient and considered in his undertakings.
We can never truly know what will happen next. Property cycles never conform to perfect timescales and each individual property market — even each street, house or property — moves to its own tune. Booms can end abruptly and rarely announce themselves when they do. The discipline to wait does not mean permanent abstinence. It is a recognition that value moves in cycles, that the right moment exists, and that acting before it arrives rarely ends well. Secret Agent has so far been patient. We believe that the moment is now closer than it has been in years — not because the risks have disappeared, but because the conditions for sound, considered acquisition have begun to return. All one needs to do is observe.
Paul E. Osborne
NOTES
¹ Readers are encouraged to consult Eleanor Robin’s thesis, Captain Charles Swanston: ‘Man of the World’ and Van Diemen’s Land Merchant Statesman, University of Tasmania, 2017.