Back in September 2018, well before Covid-19 and a global recession came along, the house price ‘disaster’ merchants were vocal about the risks for a ‘crash’ or ‘collapse’ in house prices.
One such perpetual house price gloomster, Martin North from DFA, was actually on a 60 Minutes TV program where he said there was a 40 to 45 per cent fall in house prices over the next 3 years.
It was riveting viewing and very scary for home owners and those looking to buy their first house.
Such was the absurdity of this forecast, that I offered Martin a bet about his forecast. I offered the generous odds of 6 to 1 relating that house prices would fall 35 per cent (not 40 to 45 per cent) within 3 years.
It was a real surprise, given Martin’s forthright research, that he refused to take the bet.
But all was not lost.
Tony Locantro from Alto Capital stepped up and he took the bet.
To avoid any confusion, the terms of the bet were as follows:
“We are wagering $15,000 to $2,500 that Sydney or Melbourne or national wide house prices will or will not fall by more than 35 per cent from their peak at any stage before and up to the December quarter 2021.
“The measure will be based on the Australian Bureau of Statistics Residential Property Price Indexes, Eight Capital Cities, Catalogue No. 6416.0.
“This means that if, at any stage 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 or the eight capital cities, Tony has to give me $2,500.”
Where are we now?
Fast forward to the latest ABS house price data for the September quarter 2020 and the chances of a 35 per cent price fall before the end of 2021 are slim.
The ABS data showed that house prices in the 8 capital cities rose 0.8 per cent in the September quarter to be 4.5 per cent higher than a year ago.
In terms of the bet with Tony, the revised ABS history shows that the peak to trough moves were largest in Sydney where prices dropped 13.1 per cent between the June quarter 2017 and the June quarter 2019. The peak to trough fall in Melbourne was 10.6 per cent and for the 8 capital cities, the fall was 8.7 per cent.
Alas for Tony, the June quarter 2019 was a low point in the current cycle for house prices and since then, Sydney prices have rebounded 9.2 per cent, Melbourne is up 8.5 per cent while the 8 capital cities measure is up 7.0 per cent.
The unofficial house price data so far for the December quarter 2020 points to rising prices in all cities. If this is replicated with the ABS data, it will go close to erasing all of the losses in the mini-downturn a couple of years ago.
Indeed, it now looks very likely that house prices will actually rise over the 3 years from the time DFA’s Martin North made his heroic forecast of a price free-fall on 60 Minutes.
There are still five quarters to go for the bet to be finalised and a lot can happen in that time. But any measured, sober analysis of the housing market would suggest broad price stability over that time.
Low interest rates remain a strongly positive cyclical force for prices, but this is likely to be offset in large part by weak demand linked to low immigration and ongoing solid supply from new construction activity.
Suffice to say, I am confident that I will not only win the bet, but interestingly, it is likely that house prices will actually be higher when the final data point is released in early 2022.
An unexpected global health pandemic and deep recession were not enough to undermine house prices, at least in the short term.
All up, it is yet another humiliation for the house price pessimists who have been wrong for a very long time.