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 

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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.

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The RBA admits it stuffed things up – sort of

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Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.

The costs to the economy includes lower GDP growth and higher unemployment, that lasts for at least for several years.

A few terms first.

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

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

Curiously, both assessments are wrong.

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