House prices in Australia rose by 1.6 per cent in the March quarter to be 7.4 per cent above the level of a year earlier, the official Australian Bureau of Statistics dwelling price series for the March quarter show.
For those who follow the house price issue and debate, in September 2018, I made a bet with Tony Locantro, Investment Manager with Alto Finance concerning house prices.
The bet, which was based on Locantro’s view that house prices were likely to fall by 35 per cent, peak to trough, at some point before the end of 2021.
For 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 in early 2022.
I offered the very generous odds of 6 to 1 on this happening.
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The news on house prices since the bet was made have been positive – prices have generally increased. With a year and three quarters still to run on the bet, the current run rate for the three components of the wager are as follows:
Eight capital city prices: Peak December quarter 2017. Change up to March quarter 2020: just -1.2 per cent.
Sydney: Peak June quarter 2017. Change up to March quarter 2020: -4 per cent.
Melbourne: Peak December quarter 2017. Change up to March quarter 2020: -0.5 per cent.
Of the three markets, the weakest has been Sydney which is down just 4 per cent from the peak, while Melbourne is basically back to the price levels at the previous peak.
In the next seven quarters, house prices are likely to be soft. Demand from the reduction in immigration will undermine prices, and there is some residual oversupply in a number of major cities as a strong pipeline of dwellings are completed.
High unemployment and persistent low wages will work against additional borrowing and are likely to dampen prices until the point where the labour market improves.
Against those negative influences, record low interest rates will support the market and for those workers largely immune from the employment and wage effects of the COVID-19 crisis, they are in a fabulous position to buy into a soft market.
Signs of a turn in the economy as the COVID-19 lockdowns are relaxed could also help to support broader confidence in the economy and with that, the housing market more generally.
The bet looks safe
Even with the COVID-19 economic depression unfolding, house prices remain unlikely to fall by anywhere near the 35 per cent forecast by Locantro and the even gloomier Martin North from DFA Analytics who was famously on the 60 Minutes TV show highlighting risk of house prices falling 40 per cent.
It is possible, even probable, that Australia-wide house prices will rise by the time the debt is concluded within the next two years.