My house price bet with Tony Locantro - an update

Mon, 01 Apr 2019  |  

This article first appeared on the Yahoo Finance web page at this link: https://au.finance.yahoo.com/news/aussie-property-crash-looking-even-unlikely-heres-021138614.html 

----------------------------------------------------

My house price bet – I’m very happy and getting ready to collect

I recently made a bet with Tony Locantro, Investment Manager with Alto Capital in Perth on the extent to which house prices would fall over the next three years.

Just to reiterate, the bet centred on Locantro’s view that prices would drop 35 per cent or more by the end of 2021 from the peak levels in 2017, a forecast that looked absurdly pessimistic given the raft of factors that influence house prices over the course of years.

For Mr Locantro to win the bet, house prices measured by the Australian Bureau of Statistics on a quarterly basis in either Sydney, Melbourne or for the average of the eight capital cities would need to fall by 35 per cent or more from the peak levels by the time the December quarter 2021 data are released. The ABS released the latest residential property price data last week which presents an opportunity to see how the bet is unfolding, admittedly with three years to go until it is settled.

As everyone knows, house prices are falling in most cities, reversing part of the boom over several decades.

According to the ABS data, and in terms of the bet with Locantro, here is the latest scorecard:

                    Date of peak           Total fall to date - December quarter 2018  

Sydney            June quarter 2017               9.1%

Melbourne       December quarter 2017      6.4%

8 Capital Cities December quarter 2017     5.1%

To date, the run rate suggests prices will not fall by anything near 35 per cent. In other words, the decline in house prices has to accelerate from now and be sustained for the peak to trough decline to exceed 35 per cent. While there is a slight risk such large falls will occur, it remains very unlikely that the housing market will experience such a crash.

Here’s why

There are several basic reasons for this. Interest rates are low and are likely to be cut further which will put a floor under demand. At the same time, the improvement in affordability from the lower house prices, plus moderate incomes growth has seen first home buyers take steps into the housing market.

With a large pool of potential first home buyers eagerly waiting on the side lines, with deposits at the ready and finance approved, an important source of support to housing is likely to materialise over the near term and the next few years.

The other important issue suggesting a bottoming on the housing cycle in the next year is the current slide in building approvals, which will severely curtail new supply. Any over supply that currently exists will not last for long with Australia’s population still growing by around 300,000 to 350,000 people a year.

Those people will need to buy or rent a dwelling meaning a floor under prices is likely to materialise as new construction of plummets.All up, it looks like house prices will remain weak for another 6 to 12 months until these stabilising influences start to impact.

This means that peak to trough prices is likely to be around 15 to 20 per cent at most which means a large margin in my favour as the bet draws closer to settlement.

comments powered by Disqus

THE LATEST FROM THE KOUK

The weak economy is turning higher

Mon, 15 Jul 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/just-how-weak-australia-strong-economy-213520159.html 

----------------------------------------------

The weak economy is turning higher

In the space of a couple of months, the rhetoric on the economy has gone from strong to weak.

Curiously, both assessments are wrong.

The economy was actually weak during the first half of 2019 and, if the leading indicators are correct, late 2019 and 2020 should see a decent pick up in economic activity.

It is not clear what has caused this error of judgment and the about face from so many commentators and economists, including importantly the Reserve Bank. A level-headed, unbiased look at economic data confirms that in late 2018 and the first half of 2019, the economy was in trouble. There were three straight quarters of falling GDP per capita, house prices were diving at an alarming rate, there was a rise in unemployment, wages growth remained tepid and low inflation persisted.

These are not the dynamics of a “strong” economy.

Only now, in the rear view mirror look at the economy, are these poor indicators gaining favour, leading to generalised economic gloom.

Australia needs ‘fiscal stimulus', but what does that actually mean?

Wed, 10 Jul 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/australia-needs-fiscal-stimulus-but-what-does-that-actually-mean-203000918.html 

------------------------------

Australia needs ‘fiscal stimulus', but what does that actually mean?

With the economy down in the dumps and the per capita recession now extending to nine months, there is a frenzied call for the government to implement some spending and tax policies to stem the bleeding.

The calls are coming from economists, journalists, the RBA Governor and a bevy of commentators who are demanding a fiscal policy boost from the government to support economic growth. This is all fine and there is a strong case for policy makers to work together to do something to lift the pace of economic expansion.

But there is a problem with the generic “fiscal policy stimulus” demand given that none of the calls have been accompanied by even vague details of what the stimulus means and the areas of spending that should be ramped up or what taxes should be changed.

Sure, there is a suggestion of more spending on ‘infrastructure’ but that is never defined or specified.