The official Australian Bureau of Statistics data on house prices confirm what everyone knew - house prices are rising strongly.
According to the ABS, Australia-wide house prices rose 6.7 per cent in the June quarter to be 16.8 per cent above the level of a year ago.
All capital cities registered strong gains, the largest annual increases were in Sydney (19.3 per cent) Canberra (19.1 per cent) and Hobart (17.7 per cent). All other cities were up by between 12.8 and 15.0 per cent.
The data from the ABS fit with the more timely release of information from CoreLogic which actually show prices still rising at a solid pace through to the middle of September.
Back in 2018: “House prices are about crash”
In late 2018, Martin North from DFA appeared on the 60 Minutes TV program where he scared the daylights out of many people with the sensational claim that house prices “could fall 40 to 45 per cent” over “the next three years or so”.
WATCH: Three facts about the Australian property market.
Mr North said people were “reckless” taking out mortgages, that Australia is “in the early stages of a crisis developing” and in a worst case scenario house prices will fall as they did in Ireland – where prices fell around 50 per cent - and they “won't recover for 10 years”.
He added, “people should be cautious… you are buying in this falling market. That is a really, really uncomfortable thing to be doing… Hold off!”
These claims were outrageous and without substance.
So much so that I offered Mr North a bet – putting his money where his mouth regarding his sensational claim.
Having a financial interest in what you say is one way to test the strength of conviction of such claims and forecasts.
Despite the confidence Mr North had on 60 Minutes and my confidence that he would be wrong, I thought I would spice up my offer for a bet.
I offered the odds of 6 to 1 that house prices would fall by more than 35.0 per cent over a 3 year period. This was a smaller fall than Mr North was suggesting and the odds were generous.
The bet is framed on dwelling prices, measured by the Australian Bureau of Statistics on a quarterly basis in Sydney, Melbourne or for the average of the eight capital cities.
If prices fell by 35.0 per cent or more from the peak levels by the time the December quarter 2021 data are released, in either Sydney, Melbourne or the average of the eight cities, I will lose.
I was genuinely shocked when Mr North didn’t take up the offer.
But Tony Locantro, Investment Manager with Alto Capital in Perth, saw the exchange I had with Mr North and he stepped up to take the bet.
What is the status of the bet with just 6 months to go?
To use a horse racing analogy, I am about 10 metres from the winning post and ahead by 20 lengths. Something might cause me to lose the bet but it seems unlikely.
The data from the ABS show that, when compared to the previous peaks in house price in 2017, house prices in Sydney, Melbourne and in the average of the eight capital cities are all up.
Obviously this is nowhere near the 35 per cent fall which formed the basis of the bet.
Indeed, in the June quarter 2021, Sydney prices are 12.1 per cent above the prior peak in the June quarter 2017; in Melbourne prices are 11.8 per cent above their December quarter 2017 peak and for the eight city average, the rise is 13.3 per cent from the prior peak.
It is impossible to see prices dropping 50 odd per cent in the next two quarters.
The lessons to be learned
Even with a pandemic and the first recession in three decades, house prices remains resilient.
Australia has had a problem of low growth in supply relative to underlying demand which is driven in the medium term by population growth.
Until there is a reasonable period when supply catches up to the change in demand, house prices will be skewed higher, allowing for an occasional mini-cycle impacted by changes in interest rates or tax changes.
Curiously, despite winning the bet by a mile, it looks like those supply and demand factors are working to cool the current house price boom.
There is a housing construction surge right now and net immigration is slumped with the international borders closed due to COVID. As these dynamics work through the market, house price growth is certain to slow.
There is even a strong probability there will be pockets where prices fall, but any decline is unlikely to be more than about 5 per cent.