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 

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

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.

comments powered by Disqus

THE LATEST FROM THE KOUK

Change of view on interest rates

Fri, 24 May 2019

Having been the only economist to correctly anticipate an interest rate cut from the RBA when close to 50bps of interest rate hikes were priced in to the market last year (See Bloomberg 17 August 2018), I have agonised over the exact months the cuts would be delivered and then how many rate cuts would be needed to reflate the economy.

Recently, I was of the view that the RBA would need to cut 100bps from now, to a level of 0.5%, but I did so with relatively low confidence. This is why I recommended all clients to close their long interest rate positions on 17 April 2019 (when the implied yields were 1.10% for the mid 2020 OIS; 1.35% on 3 year yields and the Aussie dollar was just over 0.7000 at the time).

Like in most good trades that were massively in the money, I left a little money on the table while I reassessed the outlook.

Since calling for interest rate cuts from the RBA, a lot of water has passed under the bridge, especially in the last few weeks.

Events mean I am changing my view on interest rates and have been placing / will be looking to implement new trades.

Watch out Australia: There's a flood of dismal economic news on the horizon

Wed, 01 May 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/watch-out-australia-theres-a-flood-of-dismal-economic-news-on-the-horizon-211110783.html

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

Watch out Australia: There's a flood of dismal economic news on the horizon

The Australian economy is in trouble and Scott Morrison and the Liberal Party government need to come clean and acknowledge this and outline a framework how this period of economic funk is to be addressed if they win the 18 May election.

The Liberal Party is campaigning in the election on a “strong economy” and being “good economic managers”, bold claims that fly in the face of the latest score card for the economy.

That scorecard shows a flood of what is, frankly, disappointing or even dismal economic news. Australia is going through a very rare recession in per capita GDP terms and last week saw data showing zero inflation in the March quarter. Contribution to these indictors of economic funk is the fact that well over half a trillion dollars of householder wealth has been destroyed as house prices have tumbled.

Add to that the fact reported by the Australian Office of Financial management last week that gross government debt is $543 billion, almost double the level that the Coalition government inherited in September 2013, and the scorecard is looking very ratty indeed.

As the ad man used to say, “but wait, there’s more”.