House prices falls are coming to an end – and my house price bet is looking safe

Thu, 07 Nov 2019  |  

This article was written on 17 September 2019: It was on the Yahoo Finance website at this link https://au.finance.yahoo.com/news/house-price-falls-near-end-022809313.html 

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House prices falls are coming to an end – and my house price bet is looking safe

About a year ago, the melodramatic Martin North from Digital Finance Analytics made the sensational claim on 60 Minutes that house prices “could fall 40 to 45 per cent” over “the next 3 years or so”.

This outlandish forecast was so reckless and irresponsible, that I offered Mr North a chance to put his money where his mouth was, offering him a bet that his forecast would be wrong. Having some ‘flesh in the game’ when making forecasts like that really focuses the mind and tests the resolve of those making headlines and scaring the general population who may actually believe such snake oil.

Surprisingly, Mr North was unwilling to take up my offer.

This was disappointing until Tony Locantro, Investment Manager with Alto Capital in Perth, stepped up to take the bet.

I was generous, offering odds of 6 to 1 that house prices would fall by more than 35.0 per cent over a 3 year period. The bet is framed on dwelling prices, measured by the Australian Bureau of Statistics on a quarterly basis in Sydney, Melbourne or for the average of the eight capital cities. If prices fall by 35.0 per cent or more from the peak levels by the time the December quarter 2021 data are released, in either Sydney, Melbourne or the average of the eight cities, I will lose.

It is as simple as that.

The ABS has just released the June quarter 2019 house price data.

The data show that prices fell in the June quarter but at a slower pace than in earlier quarters. Prices were down 0.7 per cent in Sydney, 0.5 per cent in Melbourne and 0.7 per cent across the eight capital cities.
According to the ABS data, and in terms of the bet with Mr Locantro, here is the latest scorecard of peak to trough per cent changes:

Sydney -12.7 per cent

Melbourne -9.9%

Capital cities -8.0%

For the weakest market, Sydney, a drop of 12.7 per cent over two years is below the run-rate required for Tony to win the bet. For Melbourne and the 8 capital cities, the price declines are well short of the speed needed to hit the 35.0 per cent plus price falls by the December quarter 2021.

Alas for Tony and in good news for my side of the bet, there is a raft of news on house prices since the end of the June quarter which are pointing to house prices rising. Most notably the Corelogic daily house price series and the weekly auction clearance rates are suggesting a buoyant housing market, at least in terms of price changes.

Both of these indicators are showing that house prices have started to rise in the September quarter. The Corelogic house price series shows that with less than two weeks lift in the quarter, prices are up approximately 2.5 per cent in both Sydney and Melbourne in the September quarter.

If these sorts of results are reflected in the next quarterly release from the ABS, the ‘hopes’, if we can call them that, of a 35 per cent fall in house prices by the end of 2021 will be so remote that to be fanciful.

More importantly, interest rate cuts are still impacting the housing market, as is the recent relaxation of credit conditions for potential borrowers. Fresh supply of new dwelling is about to plummet as the recent falls in building approvals dive which, in concert with strong demand from rapid immigration inflows, is also positive for prices.

While the finish line for the bet is still 2 and a half years away, it seems that 35.0 per cent house price falls are highly improbable and if anything, at the end of 2021, house prices will be higher than when the bet was made!

I wonder what Martin North and Tony Locantro will think of that when it happens?

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

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What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.