How to spot a fake – it will revert to mean

It’s a sad fact that so many great things in life that seem so real turn out to be so fake.

And it’s us poor punters who are usually last to catch on. Finally finding out only make us feel the right twit.

TakeMilliVanilli. How was the record-buying public to know thatRobPilatusand Fab Morvan had even less singing talent thanDavidHasselhoff?

Or the stock market peak, reached in 2007. The nation’s investors were as high as kites (or at least as high as KeithRichards), giddy on profits. Now, $700 billion of real and paper losses later, we understand that even a meat pie at the footy wasn’t that overpriced.

Un. Real.

Perhaps a sign should have been that the All Ordinaries had grown compound at 22 per cent between March 2003 and October 2007. Add another 3-4 per cent for dividends.

The long-term average growth rate for shares is half that figure.

Like eating, growth that is too fast can lead to indigestion.

The theory is called “reversion to mean” – anything that spends a long time away from its average will eventually come back to it.

From early 2003, Australian shares had a run of luck as long asFerrisBuelleron his day off. Enter the theory of mean reversion and you get one of the biggest crashes in Australian stock market history.

Now, what else is still floating a long way from its average?


WA, more than any other state, knows how tight the job market is. The resources boom sucked up jobseekers from everywhere around the country.

At the end of December, WA’s unemployment was 2.8 per cent against the national average of 4.5 per cent.

The longer-term average for unemployment inAustraliawould be somewhere between 6 and 7 per cent. That’s roughly what economists believe the national average will be later this year. And the big boys (BHP Billiton and Rio Tinto) are setting the pace with job shedding.

But that would just bring us back to average. It might need to spend some time above that figure, over the next few years.

Interest rates

The jobs boom can be a little hard to see. Except if your previously dole-bludging neighbour finally landed a job. Out of town. Paying a fortune. And he took his mates with him.

But if you’ve got a mortgage, interest rates cuts are a little more obvious.

If you take the average rate cut since August on a $350,000 home loan and apply that as a pay rise to a person earning $70,000 a year, you’ve just given that person a 20 per cent pay rise, after tax.

And that payrise has been at warp speed – faster than the Millennium Falcon – slamming money into the pockets of Australian consumers.

There are no mortgage payers who can remember rates this low. It was the grandparents of today’s mortgage belt who last had mortgages 45 years ago resembling these ridiculous levels. (And if Grandpa hasn’t paid off his <pound sign>4000 home loan by now, you can forget about a big inheritance.)

And they’re headed lower. If anyone out there is making financial decisions based on these interest rates being the “sustainable, long-term average”, call me.


Don’t get me wrong. I love property. I mean, really love it. I’ve written two books on the subject and I own a few investment properties. Great asset class for long-term wealth creation.

But, of everything that could be due to revert to mean … property tops the list.

Why? As the economy deteriorates, people are forced to make some tough choices about where they live. Specifically because:

  • Australian residential real estate is the only asset class in the world still in reasonable shape (every other growth asset has been repriced, including commercial property).
  • Investment properties and holiday homes will flood the market as investors cover losses elsewhere (personal and superannuation wealth).
  • As unemployment rises this year, fewer people will be able to hold on to their homes.
  • People will share housing costs (rent together), meaning the overall need for dwellings will decrease.

According to recent data, national property prices fell “just 2.6 per cent” during 2008.

Don’t be fooled. Property is a “dumb” asset class, in that it reacts to the economy, rather than trying to predict it. While stock markets are trying to see 9-12 months into the future (and therefore crashed last year), property prices move after things have changed.

There are some property spruikers who have “rung the bell”, claiming that the worst of the property market has passed us.

That’s like claiming thatKevinRuddhas found a bottom in the federal budget deficit.

BruceBrammallis the author of Debt Man Walking ( and a licensed financial adviser. Contact Bruce: