Podcast Transcript
Speaker 1:
Welcome to Real wealth Real health. The show that empowers you with insights, information and inspiration to achieve your version of financial wellness. Learn how to balance living a full life today with planning for the future. This podcast is brought to you by Alpha Investing, a real estate centric private capital network that provides exclusive investment opportunities to its members. And now, here are your hosts, AdaPia d’Errico and Daniel Cocca.
Speaker 2:
(Singing)
Speaker 2:
Hello and welcome back to Real wealth Real health. Today our guest is Akhil Patel. Akhil is one of the world’s leading experts in economic financial and property cycles. He is the director of Property Share Market Economics, editor of Cycles, Trends and Forecasts and associate director at the European Bank for Reconstruction and Development. He specializes in making robust, short and long term market forecasts including annual stocking commodity market roadmaps and key market turning points. Akhil has a professional experience in audit, central government and international banking and has worked on a wide range of issues from reviewing large infrastructure, public private partnerships to helping establish the UK’s $3 billion International Climate Fund.
Speaker 2:
He has two masters, degrees. One in finance and public policy and a first degree in the classics from Oxford. Today we’re speaking to Akhil about the 18 year real estate cycle and the historical trends that Akhil has been researching and writing and speaking about for years. We’ll talk about where we are in the cycle? What we can expect in the coming years? How to position oneself as an investor? As a business owner? The housing market, commercial real estate asset classes, and a lot more information that is very relevant not only for today, because this is not about market timing, but for an informed investor to know what information to look at? How to put it together? And how to make an assessment to make good investing decisions today, as well as for the future? This is a very important conversation and one that I know that you will come back to time and time again. We also include many resources in the show notes that Akhil has generously offered to share with our listeners.
AdaPia d’Errico:
Akhil, welcome to the podcast.
Akhil Patel:
Thank you very much.
AdaPia d’Errico:
Yeah, I’m really excited to have this conversation. When I was first introduced to you and your work, I got really excited because you were the first person in a really long time that was talking about this 18 year real estate economic cycle, which I had come across in some earlier research of my own when I first started getting into the real estate industry which I thought was common knowledge, but apparently it wasn’t. And so when I was first introduced to you and your incredible research in these webinars and this work that you’re doing, I got really excited. And so having you on the podcast is going to be such a treat for our listeners. So really appreciate you coming on.
Akhil Patel:
Oh, thank you for having me.
AdaPia d’Errico:
Yeah. Well, I would love to get started actually with not too much your background because I’ve covered that before. But how did you get interested in economics and the real estate cycle? And how did you get to this point especially also speaking specifically about this 18 year cycle?
Akhil Patel:
Well, it’s sort of an interesting story. So, I’ve never had any kind of formal economics training, all of this is self taught. My first degree was in classics. And so I suppose studying history from a very long term span I suppose gives you a sense that there are ups and downs in economic life. But really, the genesis of my interest actually started quite early on when I was at school, and I was introduced to the work of this American economist called Henry George, who wrote a book called Progress and Poverty in 1879. Well. You’ve probably never heard of it. Actually, it’s probably one of the most read works of economics in history. So even more so than Samuelson’s economics textbook, more so than John Maynard Keynes’s General Theory, more so than even Adam Smith’s Wealth of Nations. And he was essentially analyzing why we get boom and bust cycles in what he called the industrial economy and also why there seems to be increasing inequality, every time you get one of these cycles.
Akhil Patel:
So I sort of came across that when I was a teenager. Of course, as most teenagers do it goes in one area some of it, some residues left, but most of it goes out the other end. I sort of resurrected that interest probably around 2005/2006, just before the global financial crisis. Partly because I thought I wanted to know how to become a better investor. And someone who’s talking about a boom bust cycle I thought might give me that. And then, of course, we had the global financial crisis and I had picked up from Progress and Poverty, that actually it’s got something to do with real estate. And the conclusion that I came to when reading the Economist, and Financial Times, and all these eminent publications trying to explain what was going on. The conclusion I came to is that people didn’t really see the kind of historical perspective.
Akhil Patel:
And part of that was because my father’s business in 2008, was suffering some pretty severe problems largely down to banks calling in their loans. And there’d been a period in the early ’90s where the same thing had happened in both episodes have been preceded by a major real estate boom, as we go the ’80s and also in the 2000s. And I’ll say, well, there’s clearly some correlation here. And but why is no one talking about it? And so that got me into looking into are there cycles? What do they mean? And crucially if we were to go through another cycle, how could you take advantage of it? Or how could you manage your affairs that you wouldn’t be severely affected by which I wanted to help other families go through the problems that my family had been through in 2008,2009. That’s essentially how I got started.
AdaPia d’Errico:
Wow. So it was when your family went through it, what are some of the things, how did you get out of it? Maybe we can just touch on that really briefly. Because we always tend to focus on this happened and I went through this, and then I came out the other side, but what were some of the things that you learn through that experience that helped you pull all of this research together and just make it through? Because well, a lot of people suffered, obviously. So I’m just kind of curious from your personal experience?
Akhil Patel:
It’s a good question. So I think how you look at the cycle might depend on whether you’re an investor, or whether you’re a business owner. Essentially, at the end of each 18 year period there’s a major problem in the banking system. And the response of private banks to that is to call in loans and stop lending to small and medium sized enterprises. And they need bank finance for working capital and other needs. And we’re not even talking about major capital investments, we’re just talking about simple day to day needs for finance. And if businesses don’t have access to that finances, when and you want, when there’s problems in the banking system, then a lot of businesses close or have to severely reduce their size and lay people off.
Akhil Patel:
And so I suppose the lesson from that is, if you are able to anticipate when we might be getting to the peak of the cycle, a business owner would build up cash reserves, they would resist the temptation to take advantage of easy credits, which is what you get at the peak of the cycle. You may hold off on major capital investments, you may not expand your workforce quite as much as you’re inclined to. Now, there is a cost to that, because you will feel that you’re losing business and you’re not taking advantage of good times. But that actually tends to help you in the downturn, which follows after the peak.
AdaPia d’Errico:
Wow.
Akhil Patel:
So that’s kind of one of the lessons from a business perspective. Obviously, investors might take different lessons from that.
AdaPia d’Errico:
Yeah. And to that and what do you think maybe some of the lessons on the investor side are? Or does it make more sense maybe to walk us through the whole 18 year cycle? From an investor’s perspective, especially a real estate investors perspective?
Akhil Patel:
Okay. Yeah, maybe just by way of background. So it’s an overall 18 year cycle. We’ve called it both the real estate cycle, the economic cycle. It’s essentially the economic cycle. I appreciate that other people might use that term slightly differently, but it’s driven ultimately by a cycle in real estate. And what tends to happen is at the start of the cycle, real estate prices are very low. There’s a lot of problems in the banking system, which the economy is working through. And so the first few years are relatively slow. But then things get back to normal, the economy expands, people get their confidence back, they make investments, economy grows, businesses get more profitable. And so you tend to have a period of expansion that lasts about seven years. And seven years in, things may have gone a little too far in terms of exuberance and you often get a mid cycle recession lasting a year or two at most.
Akhil Patel:
But because the recession in the middle of the cycle hasn’t really been preceded by a major boom in real estate agent, but the banking system is relatively healthy because it’s` put in place scripts or regulations after the last crisis, and hasn’t done anything too bad. The banking system stays resilient real estate prices stay sort of fairly stable. And that sets the scene for the second seven year expansion, which is the more bullish expansion. And that’s when because we’ve got through the mid cycle, there’s more confidence, people have more of a go, credit is more available that can help push up asset prices, there’s much more exuberance, there’s euphoria, there’s mania. And the final two years is when of that second seven year expansion is I’ve called the winner’s curse phase, it’s not a term that I made up. And it’s where things are really going over the top. And if you think back to the period of about 2004, when you could get a mortgage without declaring income, you could borrow any sort of money for your business.
Akhil Patel:
And there’s all sorts of shenanigans going on should we say, in the banking system. No one was really checking. Even if people thought there were problems, no one really cared to do anything about it when everyone was making money. So you get final two years of blow off into the peak. And then at some point, things come crashing down and there’s a kind of, it’s intended to go in waves, the real estate market slows down, then the economy starts to slow down, the stock market picks up on this, and then has a major crash that causes banks problems in the real estate, and problems the stock market tends for banks to call in loans, etc which then feeds in on itself, deepens the recession, may become a full blown crisis. And then that process takes about four years to completing as so overall 18 year period.
AdaPia d’Errico:
And this has been… So that’s really interesting. I know you have a lot of research and you have outlines and maybe we can find an image to include in our show notes so that people can like follow along and see it. This historically, has always played out. This is what I think is so fascinating. Because every time we’re at any kind of a moment in a cycle, even right now. I’m thinking about all these things that I’m reading that are like it’s different this time, and this indicator is different than the last time, and what if this time is different? Because of course, everything changes. So I think what’s really fascinating is that it’s historically played out, is that right? The cycle that you’re talking about is, how far back does this go, actually?
Akhil Patel:
Well, the United States since at least 1800. So it’s persisted when the US was a say, should we say rather backward agrarian economy to through the times when it developed and it was the emerging in markets of its day to when it became the industrial powerhouse of the early 20th century to the highly technologically advanced economy which is today. It’s persisted and their ultimate reason is that while of course, the mode of economic activity is changing from predominantly farming to heavy industry, to technology and services that you have today. Fundamentally, it’s an economic cycle driven by speculation in real estate, speculation land, and that of course, has persisted since the beginning and will always do because of the way that our economic system is structured.
AdaPia d’Errico:
Okay, that’s really interesting. So where would you say then we are in the cycle, today? Given this, again, very odd last year, where are we in this 18 year cycle?
Akhil Patel:
So we’re at the midpoint. Now, I know that some people would have you believe that we’re in the worst crisis since the Great Depression, or even worse than the Great Depression. And you could marshal some data to support that only in the sense that if you tell everyone to sit at home and do nothing, you’re not going to get very strong economic growth, because obviously the number of transactions taking place in the economy reduces. But nonetheless, it’s also unusual to go through a recession where the government can effectively clap it’s hands and say, “Right, everyone stop moving again.” And things are open. And also, it’s very unusual in the sense that balance sheets of households have actually improved in aggregates. I know obviously, a lot of households have had very severe problems during the last year or so. But in aggregate, household balance sheets have improved. So it sort of supports my thesis that I’ve made, actually for a number of years that the mid cycle recession is, the lesser of the two recessions that you get in within each overall 18-year cycle.
Akhil Patel:
It’s not just to say that it isn’t problematic and if you look to the previous mid cycle that was in 2001, you had a recession, we had 911, it means a lot of issues to do with that. The widening the cycle before that was the early ’80s was actually was a relatively significant recession, after the chairman of the Federal Reserve put up interest rates to short term interest rates to above 20%. And of course, no economy can survive that kind of interest rate for very long. And so you had a fairly significant recession, but things moved out of it pretty quickly. And we had the boom of the ’80s. And so I don’t expect anything to play out particularly differently. Of course, we’ll have to get through the global pandemic, get vaccinated there’ll be major adjustments for certain industries because I think one thing that we can say about the last year or so is accelerated technological trends that may have played out over a number of years, it’s sort of made them play out over a number of months.
Akhil Patel:
And clearly that will benefit some industries and negatively affect others. So, some of that will take a number of months or maybe even a couple of years to play out. But that’s the case with any recession, there’s always some kind of change that takes place out of it. What I think the mid-cycle will do, and I actually just wrote a piece about this yesterday. What I think the mid-cycle does within the context of the overall cycles, it changes the narrative. The narrative between the start of the current cycle around 2012, when real estate prices bottomed and things start expanding again is no one single day when a cycle begins or ends. But around 2012, it was still very much thinking that anytime there was any problem, we’re thinking we’re having a return to the financial crisis. And the news was relatively negative for a number of years.
Akhil Patel:
It was only fairly late on in the expansion that it became a bit more positive. I think what the mid-cycle recession as part of the story this time we’ll do, it’ll move people on. So when we look back in the early 2020s, and the mid 2020s, we will look back to the Coronavirus induced recession. And we’ll see that we got through it relatively unscathed. Again, appreciating that some people, that’s not the case, but in general. That means that we won’t remember any potential lessons from the boom of the 2000s. So that enables the cycle to repeat.
Daniel Cocca:
And so as it relates to kind of where we are today, right? In your research, you have this lead economic indicator that you use to kind of talk about where we are, how close we are to the peak, where is that number today? And could you just kind of give the folks listening to this podcast a sense for how that works?
Akhil Patel:
Yeah, so actually the indicator is for the UK, it seems to work better. For the US, I’ve never been able to get it to work in a way that an economist would be happy with. So I don’t know what the specific number is for the US because I haven’t refined the indicator. It’s still well of the kind of trigger threshold points for the UK. It’s quite hard to use the indicator to say how long it will take to get to that point. It doesn’t really work like that. You got to use historical knowledge and kind of identify where we are? And then say, “Well, history is to repeat, it’s going to take this long.” And then as you get close to the time, you will see signs of things going over the top. And there’ll be very obvious. Things like really extravagant behavior is often very good when people start announcing the world’s tallest building, after several years of expansion.
Akhil Patel:
When it’s easier to get a loan than it is to probably buy a beer in a pub. Which selling it seems to be the case of the moments in lockdown and those are the sorts of things that are a sign that the market is getting way over the top. That’s when you pay a lot of attention to things like my indicator, you pay a lot of attention to a potential inversion of the yield curve. When you get some big businessmen, hope it’s not you guys saying that property prices will never go down again, publicly.
Akhil Patel:
And in fact, the Coronavirus will be a good example of why they will say that because, and I’ve seen some stories in Bloomberg about Vancouver real estate and saying, “Well, we’ve survived 100 year pandemic, and property prices have not gone down.” And so you can see in a very frothy situation that this will be used as evidence that actually the real estate market is in fairly good shape and is resilient and all that sort of thing. So you kind of build a picture of where we are using a number of different indicators and stories. But ultimately the regularity of the cycle is such that all you really need to do is, know that real estate prices bottomed in 2011/2012. Add 14 years to that and that will give you a pretty good time zone for when you should expect another peak.
Daniel Cocca:
So as we’re approaching that peak, right? And we think about, I remember reading in your materials that the cycles kind of went from 17 at the shortest to 21 years at the longest. And so, in that moment leading up to a peak, what you’re saying is we will see certain behavior, it sounds like you’re saying consumer behavior, and government, fiscal policy behavior that will be an indicator to us that we are actually approaching the peak.
Akhil Patel:
Yeah, look, I don’t want to pretend that any of this is particularly easy. And something will come along to probably make me look a bit stupid. When we get towards the peak. This is what markets do, they make the most informed commentators look like they don’t know what they’re talking about. And now the reason why one of the cycles was 21 years is actually probably the roaring ’20s, so in 1920. And what’s quite interesting about that is the real estate market did indeed peak 18 years off the previous one in 1926. But what that ended up doing, because the stock bull market was so strong that a lot of money came out of real estate and got pulled into the stock market.
Akhil Patel:
And so, we tend to think of the peak of that cycle is 1929 because that’s when the Dow Jones peaked. But actually, from a real estate cycle point of view it peaked a couple of years earlier. And then the stock market had additional colonies. Now, one of the reasons for that was, I believe the US Federal Reserve reduced interest rates in either 1926 or 1927. In fact, two of the strongest years in market history were in 1927, and 1928. And then the other thing is that was the first cycle after the Federal Reserve had been created. And I think there’d been a strong bull market, there was the heady optimism of the 1920s, there was a sense that you’d created this institution that can actually indeed, tame the boom and bust cycle.
Akhil Patel:
I suppose that gave… And then interest rates have been reduced. And so the combination of those things, extended at least the stock market side of the real estate cycle a bit longer. And so you might get something similar. There is the possibility that you can see a story that the government has got us out of Coronavirus, this new era of cooperation, interest rates are low and actually inflation is relatively stable, which it could be if they’re actually longer term cycles which suggests that actually inflation may be relatively stable for most of this century. So, you can see that feeding into a story saying that we know how to manage a boom bust cycle.
Akhil Patel:
And people, there’s a lot of new retail investors involved in the markets and they, as far as we can tell from the last 12 months seem not to have any sense of valuations whatsoever. So, things just go up, and up, and up for longer than we think possible. And I’ll be saying, “I know the pitch should have been in 26, and it actually goes on a bit longer.” And then people think well, maybe I don’t know what I’m talking about, but you will see signs, you’ll see signs. There always is something.
Daniel Cocca:
It’s interesting, because when we were sitting here in 2015, right? We were all having this discussion around, we’re two to three years away and obviously not, someone like you who’s working on this 18 year cycle, but generally speaking in real estate people are saying, “Lingering recession is coming.” And that pushed a lot of investors into self storage, into a mobile home assets that they thought would perform better or had during the Great Recession. And now that we’re getting kind of continuing through, it feels like every year we kind of push that out a couple years or folks in real estate still talk about, “Hey, two to three years from now we’re still going to see compressing cap rates in most real estate asset classes.” And we don’t underwrite deals that way.
Daniel Cocca:
But personally, that seems like, that’s kind of the path that we’re taking. But then at the same time as we look at new projects, we see folks making acquisitions at sub four cap rates, regular basis and it just seems very, very low. And so the challenge that I personally have is seeing how we have another five years of this real estate expansion of sorts. Yeah, that’s just a thought. But we’ve been kind of gearing up for this for a few years now, but yeah, trying to figure out what’s actually on the horizon?
Akhil Patel:
Yeah, I can’t say that it’s an 18 year cycle doesn’t mean that every asset class goes up for 18 years and there’s no kind of debt. Clearly, money rotates between different sectors, between the stock market, between the bond market and within the real estate market it goes from residential to commercial and then within commercially has different sort of, in different locations and different types of commercial real estate. So these things go through, I suppose their own mini-cycles, I wouldn’t necessarily use that term advisedly. But you know what I mean, money goes into one area, things go up then money goes into another area, and things go up and goes round and round. To your broader point about how long can this go on for. If you look at some of the stories from the late ’90s you’ll find plenty of them. When real estate was being acquired at cap rates, that you think is pretty reasonable, I’ll bet you’ll find plenty of stories saying, well, this has gone too far. And I think the reality is that for the first half of the real estate cycle, our anchoring is on what we think is reasonable based upon historical evidence.
Akhil Patel:
And then when you get to the second half of the real estate cycle, because we’ve seen that actually cap rates do get compressed, and prices do go so high. Our anchoring goes up, and up, and up. And by the end of it, we all think that what we’re paying for real estate is actually quite reasonable. Our link to that is also what alternative yields you get on other assets. And so if we live in a world where sort of deposits are negative, and you can borrow it sort of close to zero, and so on. The spread between the yield and other assets is would look fairly reasonable and people will be prepared to pay more for it. There are a lot of different factors and there are a few absolutes in the investing world.
AdaPia d’Errico:
So Akhil, when it comes to real estate obviously, different asset classes, there’s commercial, there’s residential. And as you’re speaking, I’m thinking a lot about the peculiarities of this last or the cycle that we’re in with, what happened with the pandemic and we have a stock market. That’s I think today it was 72% above the March lows of last year. And we have these retail investors like you said, that have come in, we also have now crypto currencies and this whole discussion around the US dollar. And as a reserve currency we have a housing market that boomed and we still have pretty steady certain asset classes in real estate. And so there’s all these peculiarities that actually speak to exactly what you’re saying. And now with this new stimulus in the vaccines, and there’s very little talk other than obviously some contrarians and there always will be that say, “We’re about to have a bus.” But so many bigger signals and behavior are pointing toward an expansionary approach, because we’re still so deep in this pandemic.
AdaPia d’Errico:
And people want to get out of it. And people want to expand, and explore, and travel again and so I’m just kind of making a statement around like, I’m listening, and I’m thinking we’re ready to celebrate, which is a positive sort of it’s going to be expansionary in its nature. So, as you’re speaking to that mid-cycle that we’re in for real estate investors, right? Because everything’s driven by consumer behavior, but for real estate investors specifically, in the housing market, and commercial. How do those differ, if at all? Or are they correlated in the way that they move in the cycle through the research that you’ve done? Because as investors, we’re thinking well, what is the asset class that I want to invest in? For how long do I want to invest in that asset class? Is it like, buy and hold forever? Or is it a five year syndication? So as it relates to real estate, what are some of those elements?
Akhil Patel:
I’ll give you some considerations, I’m not sure that I probably have enough expertise to be too specific. Historically, the real estate cycle starts with residential real estate, because it’s at the beginning of the cycle there’s been sort of movement of people, and so they need housing, and then that tends to initially start to rent, and that tends to push up rents. And then that capitalizes into higher prices, and so on. And that process might even start when the economy is either technically in a recession or pretty slow and so on. What that means though, is that commercial real estate tends to lag residential in the first half of the cycle, not least because that’s much more tied to growth in the economy because obviously, that affects how many businesses open and their sort of needs for space and so on. When you get the second half of the cycle commercial real estate comes into its own because growth is higher, confidence is higher, businesses are expanding more, they’re investing and so on the demand for space goes on.
Akhil Patel:
And indeed the tall building indicator that I spoke about earlier is usually a massive commercial real estate project. Which is an indication that things can really go over the top. And there’s plenty of finances willing to fund such schemes which is not the case. And the first half of the cycle because banking system is still working through the problems of lifecycle, and then it’s relatively to be cautious, and there are probably stricter regulations in place at that point. Which tend to get loosened over the course of a 18 year cycle. So that’s some of the considerations in terms of commercial versus residential. Sorry, I think there was another point you wanted me to address, which I’ve forgotten.
AdaPia d’Errico:
Well it was…maybe no, this is great. Like the difference between the two is we just kind of talked a little bit about the hold period for assets.
Akhil Patel:
Well, this is a tough one. So, I’m not a believer in overreacting to the end of the real estate cycle. So it’s not the case that you buy at the start and sell at the peak. You can do that, it’s very hard to time the peak. So I don’t advise you trying to get it to the exact day that’s the cycle of peak because you’ll inevitably be late. Look, if you have an asset which, so we’re talking about real estate here is in a good location, you don’t foresee any fall in demand, you got a good price, you not over leveraged, you can continue to service any loans on it and pay taxes and all the rest of it. I don’t see a reason ever to sell it. The problem that you have in the course of an 18 year cycle is that, the cycle starts at the center of a city and spreads out to the suburbs where it starts at the center of a country and it spreads out from primary to secondary, to tertiary cities. And the business case of those investments I think gets increasingly thin as you get towards the peak of the cycle.
Akhil Patel:
So, you might get some very speculative schemes that people are investing in towards the end. And you’ll find very soon after the peak of the cycle that there is no demand for that unit of housing, so I’m not sure what the terminology is in America, but that block of flats we’d say in the UK, you thought was just waiting for people to coming occupy it. So in those cases if you’re funding a scheme there you would be very, very sensitive to the signs of a cycle peaking because prices can go from… I know some of my subscribers were investors in Sunderland, which is a city in the North East of England. They talk about people paying about £500,000 for a house at the edge of Sunderland in 2007. And being forced to sell it in 2009/2010, for about £90,000. So, you can get some really significant drama. So you have to be quite careful when you’re going to marginal locations, tertiary cities, the business case has to be really, really solid for you to try and ride out for the downturn.
AdaPia d’Errico:
It sounds in a way almost like basic, I would say basic from the perspective of what we do at Alpha too where you’re saying, you have to do your research on like longer overall trends especially if you are going into some of these areas and markets. It’s not enough to say, why I want to own an apartment building, right? Like flats, apartment buildings. I live in Los Angeles, and there are homes in this area called Compton. I’m sure a lot of people will understand. They need a lot of work. They’re like big fixers, and they’re selling for $500,000-$600,000 Compton, today.
AdaPia d’Errico:
And is there really population growth there? Are people going to like, if you buy that home who’s living there? Who’s buying it? Are they fixing it up? And that’s on the residential side, but it goes for the same way with let’s call it apartment investing is, these areas need to be looked at in detail not just I’m going to buy a building because it’s a good time and I need to get into something which is also happening I have people reach out and say, “Oh, I found this fourplex in Los Angeles. And it’s rent controlled and it’s, I don’t know $1.2 million or something silly like that. I’m like, yeah, but you can invest that $1.2 in Nashville in somewhere else.
AdaPia d’Errico:
But it’s all trend related, where’s the growth, longer term? So, to me hearing what you just said, it kind of goes back to basics. And Dan, tell me if you agree because when we’re doing our underwriting, it’s like, what are the fundamentals driving the growth? Not just everybody’s moving to Nashville, which does turn out to be the number one city that received all the COVID migration based on a report I actually read.
Akhil Patel:
I would sort of add to that, if you spent $1.2 million on a relatively speculative asset at this point in the cycle. You might well get away with it, in the sense that you probably can find another mug in a couple years time just pay $1.2 million or if credit is more easily available then, they might even pay a bit more and they may not pay much more because obviously, the fundamentals are not strong. What you don’t want to be is that person in five years time is paid $1.5 million for something which doesn’t have a solid evidence behind it. Now, I’d add one further point to that we’re always in, if you read the papers and believe the papers and probably a lot of pretty solid real estate publications, where we have a perpetual housing shortage.
Akhil Patel:
And the reality is that some of that is based upon assumptions around demographic trends and population growth, which is influenced by the number of births and all this sort of stuff. And when you get a speculative mania people over build as if that no one has any housing anywhere. So and I think, what was a statistic from Ireland, and from Spain, and some of the European countries in 2008, was a had enough housing stock being built for about 20 years or something. It can really… and I’m sure that not all of them were totally kind of done, they probably did some research and thought that there is a housing shortage maybe there wasn’t in Ireland, but there was a housing shortage.
Akhil Patel:
But if everyone is building, catering to that. Then you’re going to get overbuilding and it’s usually apartments which tend to be the things that are overbuilt the most. So, if you’re in an area where there’s a lot of apartment building going up, I would be very cautious at the end of the race day. So of course, if you’re in the same area, but you’re building family homes for medium income earners, then actually that’s probably not an unreasonable investment. Because if people are still going to be in that area, families need space and they want to be close to schools and other things. And there’ll be strong demand for that kind of investment. And so that probably will be able to ride out the downturn a lot better.
AdaPia d’Errico:
Yeah, that’s great advice. It’s really good to look into and it speaks to the way that we believe that we should look at things as how investors should look at things. And one thing I wanted to circle back on that you said earlier is, it kind of started with your interest in history. And obviously, historical economics. Are there any other important cycles for people who want to maybe nerd out or dig in and do some of their own research? What are some of the other cycles that you’re looking at specifically, or that you would recommend that somebody wants to get more familiar with that are worth looking into, to help shore up our understanding, to make better investment decisions?
Akhil Patel:
The main one from an investor point of view is the 18 year cycle. The other major cycle that I write about is called the Kondratieff Long Wave, which is a 55 to 60 year cycle principally seen in commodity prices, but is also related to the adoption of technology, it’s also related actually to the level of kind of friction within societies and international politics as well. So, you tend to have 25 to 30 years of rising commodity prices, increasing tensions internationally, a lot of turbulence within societies, a lot of technological change which often causes that friction because people lose jobs and not necessarily skilled for the new economy that’s emerging. And then add 25 to 30 year period of kind of falling prices, when maybe things are socially a bit calmer. But the recessions on the downside of the long wave tend to be much more significant and much harder to get out of. So we’re currently and actually what’s interesting about the 2020 is, we’re in one of the periods where you’ll have both the peaking of the real estate cycle and the peaking of the long wave simultaneously.
Akhil Patel:
So not only I think will it be a very bullish period for investors it will also be a fairly turbulent one. So I don’t expect the news to get any easier. Which can often be a bit of a distraction for investors. So I think that’s something that they could look into, bear in mind that I read long way differently to a lot of commentators and a lot of them say we’re on the downside and we’re getting to a deflationary bust and all this kind of stuff, I think just looking out the window would, at least to my mind, suggest otherwise in reading the news. I mentioned earlier the potential that inflation will be relatively stable for the rest of the century. So there is this thing called the Great Wave, which is about 18 to 100 year cycle in inflation. And so you tend to have these, what are called price revolutions which last a century, where inflation goes up very high.
Akhil Patel:
And then you have areas of price equilibrium. This goes back to work by this historical David Hackett Fischer. And during equilibrium periods, prices tend to be relatively stable for about 80 to 100 years. And so the 20th century was a price revolution. So prices in 1900, were a lot lower than they were in 2000. I suspect if the pattern is to repeat, it’s been going on for at least 800 years. If that cycle were to repeat, it’s not really a cycle it’s more of a wave, that wave were to repeat. And then you’d find relatively stable inflation into the and around 2100 when hopefully, they’ll have found a cure for mortality. And so we’ll still be around to see if I’m proved right or not.
AdaPia d’Errico:
Well, it kind of reminded me because I was just reading this. I follow Ray Dalio’s work. I’m sure you do too. And he’s big into his historical economics and he was saying that one of his kind of worst moments I suppose is he called on big national television the beginning of a huge down cycle right before the big boom, maybe it was the ’80s or something like that. I know everybody gets it wrong which is fine. Nobody truly knows we can only learn so much from history. But I think it’s so interesting to look at those trends, and at least be informed to make a larger informed decision. Because like you said, you read the news that’s so filtered especially with algorithms these days that I think it’s really important to know where to look, what else to potentially look for, and digest as information to make better decisions. Because as investors, and business owners, and everything that we’re doing, we’re just trying to get as far along as we can. Ultimately, it’s a game of survival.
Akhil Patel:
Maybe more than that.
AdaPia d’Errico:
Yeah, hopefully, but it still feels like that because it’s like, you get all this anxiety reading the news. So it does, it triggers that fight or flight to some degree like, “Oh, my God. What do I do? I don’t want to lose? I don’t want to lose money? I don’t want to…” It’s like all this other psychological stuff kind of comes into it that I think can be, if we have that anxiety about things, which is normal to have. That with some research, with some knowledge and information we can at least make rational decisions.
Akhil Patel:
So, I think that I’ve made a couple of points to that. One about Ray Dalio, but the first point I’d make is that the real estate cycle persists, because it captures something fundamental about the structure of the economy. And not to get too technical about it, but it was first articulated by this English economist called David Ricardo in the early 19th century and he formatted thing called the law of economic rents. And it basically, in its simplest form it means that essentially the progress of society and our societies are enormously progressive. The benefit of that progress ultimately ends up in the price of land. So not real estate land, so the land on which real estate sits.
Akhil Patel:
And that makes it a magnet for speculation, because as we invest in building our economies, and putting in train lines, and roads, and Internet, and water, and all these other things that make our societies the amazing places that they are. The ultimate gain of that is in real estates, in land. And therefore, because it’s basically unearned increment, and therefore attracts a lot of speculation which then goes over the top, which then squeezes the economy, which then brings the economy down. And because banks have over lent to real estate, then the banking system comes down, and then businesses don’t have credit. And that’s why we get the boom bust cycle. This was first set out in the work by Henry George that I mentioned earlier.
Akhil Patel:
Now, the reason why this weird state cycle persists, because the structure of the economy has not fundamentally changed, despite all the technological change that we’ve experienced over the last 250 years. If for some reason we were to change that, then I would be the first person to say then we probably won’t get a repeat of the real estate cycle. But until that changes, in fact, the most well connected political and financial interests in our countries have every incentive to keep this persisting and so there’s really no reason why the cycle won’t persist. Now, that brings me neatly on to Ray Dalio. So he’s done a fantastic job, pulling together all this research and putting it out there. The one thing that he doesn’t get is the land.
Akhil Patel:
And so the reason why you get massive buildup of debt is because the banking system ultimately mostly does is lend to people to buy real estate. And as an asset, globally it’s much bigger than the bond markets, much bigger than the stock markets, and so on. And yet no one really sort of truly understands this. And so, if you take… Ray Dalio’s work is I’d say slightly, I’m not trying to be facetious here, but I think it’s quite complimentary to the research that I have put out there. But fundamentally, if you’re going to, and he’s got much better access to data and so on. But fundamentally, you need to understand the land situation, if you want to successfully forecast how economies are going to develop and move forward.
AdaPia d’Errico:
I love that. Thank you, the land issue. Now, I’m going to go down a different rabbit hole, personally not right now. Because we’re running out of time, but so it’s really important. Thank you, I guess, just the one last thing, is that tentative? Because nobody’s making more land. Is that part of it? Because I know plenty of people that have bought land, and they can’t do anything with it, because maybe they bought in the wrong spot, or it’s probably not that, but what is it about land? Or is it really just that people are borrowing money to buy real estate on land, as you said?
Akhil Patel:
It’s a bit of both. So ultimately, location matters. So, despite the fact that we’re all in, we can work remotely and so on, we still need to be in certain places, and we tend to cluster together partly because economic activities more efficient that way. And there’s only so much land in certain locations. And so whoever owns that piece of land has monopoly pricing power. And so you get basically all of the fruit of progress. So as the economy becomes more productive, and you can get more out of a particular site. What ultimately takes all of that is the rent that you pay to whoever owns the land, it might be yourself, but then you’re taking more of the product as rent as opposed to business profits or wages if you’re an employee.
Akhil Patel:
And so yes, it’s linked to the fact that land is ultimately scarce, but it’s because it’s locational. United States has virtually unlimited land. But you could go to the middle of Wyoming and buy as bigger pieces you actually made. Wyoming’s quite expensive now, but ultimately the really valuable stuff is in and around primary and secondary and tertiary cities. And then yes, the banking system then comes on, and top of that, and adds fuel till the fire is over.
AdaPia d’Errico:
Right. Oh, amazing. Thank you for that. That’s really clarifying. So, one last thing I wanted to ask you about, I know we’ve talked about this, if you want to, is tell us about this book that you’re writing. What motivated you to write the book, and why you feel it’s so important to write a book at this time about this topic?
Akhil Patel:
Well, so as you know, because you came across the 18 year cycle a while before you met me. So there are other people who have written about it. So what I will try to do in the book is distill all of that sort of insight. So what’s the cycle? How many stages does it have? What happens at each stage? What’s the historical evidence? I won’t repeat what other people have written. But I will try and distill some of that. I think the advantage that I will provide to the reader of my book that may they won’t find elsewhere is, for each stage of the cycle, I’ll say here are the sorts of things that you should be looking out for, based upon my reading of history.
Akhil Patel:
And as an investor or a business owner, this is what you should be doing about it to take advantage of the expansions and make sure that you’re protected during the downturns of your cycle. That’s essentially what I’m going to do. And the reason I did it was I circle back to what I said at the start. When my family’s business was experiencing problems in 2009/10. I made it my mission to try and develop a body of knowledge such that we will be prepared and other families will be prepared. The next time we had a crisis and so this is the kind of resolution of that hopefully, the resolution of that mission.
AdaPia d’Errico:
Great. Well, is that going to be a 2021 release, do you think?
Akhil Patel:
I certainly hope so.
AdaPia d’Errico:
All right.
Akhil Patel:
It’s a good plan and when we’re in the middle of the recession, it’s actually a good time to be releasing something saying that, we’re going to have the biggest boom of all time possibly in front of us. Firstly, because it sounds contrarian and so hopefully garners a few headlines, but also, as I hope and I think I’ll be able to say in a few years time that I told you so.
AdaPia d’Errico:
Well, I look forward to when that book is out and we’ll have you on again when it does come out. So last question, which is something that we ask everyone, what is real wealth to you? What does wealth mean in your life?
Akhil Patel:
Well, I think the lesson from the last 12 months. You can have all the material goods that you could possibly conceive overnight. I’m not a very wealthy man, but I’m comfortable. That really what it is, is health and very importantly, as I live alone, social connection. So having a strong network of friends and people that you can share sort of your life with whether it’s virtually or walking around the park or hopefully one day sitting in a restaurant outside. I think, for me wealth.
AdaPia d’Errico:
That’s amazing. Thank you, thank you for your time, thank you for coming on, and sharing your wealth of knowledge and experience. And I’ve learned so much and we have all these notes. And so we’ll have links, I’m going to link to the new piece that you said you wrote, and some of the other links that you’ve put in there. Aside from that, tell us where people can find you, if they want to connect with you. What’s the best way to do that?
Akhil Patel:
Probably via the website of the business that I run with a good friend of mine, Phil Anderson has also written a book and I’ll just do a quick plug for his book. It’s called Secret Life of Real estates and Banking. And actually, he sets out the history of the real estate cycle in the US since 1800. So that’s pretty important, but it’s very influential my own thinking of course, and we run a business called Property Share Markets Economics, so www.propertysharemarket all one word. So, propertysharemarketeconomics.com. And you can also find me on Twitter AkhilGPatel, and on LinkedIn.
AdaPia d’Errico:
Wonderful, perfect. Well, I’m sure a lot of people will come and find you and they’ll have a lot more questions for you. So Akhil again, thank you so much for your time today, for being so generous with your knowledge. And you know what we’ll have you back on when you have your book out. So thanks so much for everything.
Akhil Patel:
Oh, thank you for having me.
Speaker 2:
Thanks for tuning in to Real Wealth Real Health. We hope that you’ve enjoyed today’s episode and found it both informative and insightful. We welcome all your questions and your feedback about today’s episode and especially, we welcome your questions about specific topics that you would like us to cover. So shoot us an email at podcast, at alphai.com. And if you have a moment, we really appreciate ratings and reviews as it helps us grow our online community and our interactions with you. And we’ll also be linking to a number of relevant articles on topics that we might have touched on during our conversations. Some of them are broad. Some of them are technical, but we’re always aiming to provide information that helps you better understand the mechanics of building this healthy financial foundation, especially if you’re looking to do this with real estate.
Speaker 6:
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