My house price bet with Tony Locantro: An update

Wed, 19 Dec 2018  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/35-house-price-crash-unlikely-201301480.html 

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Why a 35% house price crash is 'very unlikely'

Australian house prices dropped again in the September quarter to be 2.8 per cent below the December quarter 2017 peak, based on the Australian Bureau of Statistics dwelling price series. In many respects, the data is old news – the comprehensive Corelogic house price series for November has already been released and they show further price falls in the last two months.

House price bet

Why the ABS dwelling price series matters, to me at least, it that it forms the basis of the bet on house prices I made in September with Tony Locantro, Investment Manager with Alto Capital in Perth.

Tony and I had a bet that at any stage between now and the time the December quarter 2021 dwelling price data are published by the Australian Bureau of Statistics, the price index for any of Sydney, Melbourne or the aggregate eight capital cities prices is down 35.0 per cent or more, I will give Tony $15,000 cash. Conversely, if by the time the December quarter 2021 data are published and the peak to trough decline is 34.9 per cent or less in Sydney, Melbourne and the eight capital cities, Tony has to give me $2,500.

These generous odds and benchmark for the 35.0 per cent price fall that I offered Tony reflected the absurd nature of a forecast from DFA’s Martin North to the effect that his forecast was for house prices to “drop 40 to 45 per cent over the next three years or so”.

For the record, North rejected my offer for a wager on the terms accepted by Tony.

While house prices are weak and remain weak, a decline of 35 per cent is unlikely. Very unlikely. 

The reasons are straightforward

Demographic factors continue to favour the housing market. Population growth is strong and this unrelenting addition to underlying demand will put a floor under the housing market. Also important over the medium term of a year or two is the slump in new dwelling approvals. This slowdown in the number of new additions to the housing stock will, with a lag, lower the risk of an oversupply on housing. If new construction falls sharply, there may even be pockets of shortages into 2020 and 2021.

There is also an apparent build up in pent-up demand from first home buyers who dropped out of the housing market several years ago when prices were rising strongly. The recent housing finance data showed that the proportion of new loans taken out by first home buyers rose to a six year high, suggesting a lift in opportunistic buying as prices weaken. Suffice to say, cashed up first home buyers are set to provide a key source of fresh demand for housing over the next couple of years, a point which is likely to limit the decline in prices.

There are still a little over three years before the bet is settled on the 35 per cent house price fall.

A more realistic scenario

While the tightening in bank credit and still tight monetary policy settings will see house prices drop some more, probably through to the middle of 2019, a realistic scenario is for a peak to trough decline of around 15 to 20 per cent. When this happens, buyers will emerge from the woodwork, demand will lift and the floor in prices will be achieved. 

It would take an obscure event to see price falls get anywhere near the 35 per cent Tony Locantro is betting on.

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The RBA admits it stuffed things up – sort of

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According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.

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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 

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The weak economy is turning higher

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