Australia markets close in 4 hours 17 minutes

House prices rebound and I get ready to collect

Australian house prices are rising. Source: Getty

Avid readers and followers of the housing debate know of the bet I made with Tony Locantro, from Alto Capital, in 2018.

It was about the absurd forecast that house prices would fall 40 per cent over the next few years.

After a little fine tuning, the bet was framed along the following lines:

  • “At any stage between now and the time the December quarter 2021 dwelling price data are published by the Australian Bureau of Statistics (ABS), 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.”

The official ABS data, the benchmark for our bet, was released this week covering the September quarter 2019.

House prices rose solidly in the quarter, partly reversing about two years of decline.

House prices in Sydney rose 3.6 per cent in the quarter and are now 10.0 per cent below the June quarter 2017 peak. In Melbourne, prices also rose 3.6 per cent, and are now just 7.4 per cent below the December quarter 2017 peak. Growth in capital city house prices was 2.4 per cent to be down 6.4 per cent below the December quarter 2017 peak.

While there are still two years and one quarter to go for the bet to be finalised, the fall of 35 per cent that was the benchmark seems a long way off. Near impossible I’d say.

I am not only confident to collect on the bet, but given house price trends since the end of the September quarter 2019, the level of interest rates, the build up in demand and slump in new supply of dwellings, it is likely house prices will be 10 per cent higher, not 35 per cent lower, but the time the bet is ruled off as the end of 2021.

Indeed, the data from Corelogic suggests that house prices in Sydney and Melbourne will rise by around 5 per cent in the December quarter, and for the 8 capital cities, the rise will be around 3.5 per cent.

This means that for a 35 per cent peak to trough slump in house prices to occur by the end of 2021, annual prices will need to fall by an average of at least 15 per cent over each of the next two years. With demand strong, supply falling, interest rates low, favourable tax laws in place, this is next to impossible.

All of which goes to show that buying a house to live in, virtually at any stage of a house price or interest rate cycle is a good idea if you have a long run time horizon of more than 10 to 15 years.

Over such a lengthy cycle, house prices in most cities in Australia will trend higher, usually by a large amount. Postponing decisions to buy on the expectations of a sustained lowering in house prices is generally a costly exercise, partly because price pull-backs are usually moderate and short lived.

If you postponed your decision to buy on the basis of the ”house price terrorists”, as I term them, that is those forecasting a collapsing house prices, you are likely to have forgone some capital growth since the price rebound has unfolded.

And with prices set to trend higher in coming years, lots of buyers are stepping up and getting into the market to ride the next wave in rising prices.

By Stephen Koukoulas

Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, news and tech news.