The official Australian Bureau of Statistics data on house price showed a huge 5.4 per cent rise in house prices in the March quarter which followed a strong 3.0 per cent rise in the December quarter to lock in a substantial recovery in prices from the small dip that occurred in the middle of 2020.
The price increases were broadly based. The strongest markets were Hobart and Sydney, both up 6.1 per cent, with Canberra rising 5.6 per cent, Perth 5.2 per cent and Melbourne up 5.1 per cent. Darwin, Adelaide and Brisbane were all up between 4.0 and 4.7 per cent.
Low interest rates, an improving labour market and relatively easy access to credit are seeing buyers flood the market to push prices higher.
Encouraging, a substantial driver of the buoyant demand is from first home buyers who are taking advantage of these favourable conditions to step into the market. Home ownership rates are likely to be increasing given these dynamics.
Winning the 2018 bet on house prices
The house price data are another humiliating blow those who are continually pessimistic on household debt and house prices. You know the ones that get headlines with claims that house prices are poised to drop 30 per cent, 40 per cent or more.
Which brings me back to a bet I made in 2018 with Tony Locantro, an investment manager with Alto Capital in Perth.
To be fair, the initial offer for a bet was with Martin North from DFA who was on the 60 Minutes television program around that time with claims that house prices were poised to fall by 40 to 45 per cent. His reasons were linked to the level of household debt and financial instability.
This forecast and more importantly, the reasoning, looked absurd at the time and it prompted me to offer of a bet to Martin at the generous odds of 6 to 1 that prices in Sydney, Melbourne or nation wide would not fall 35 per cent or more by the December quarter 2021.
And of course this was without any knowledge of the COVID-19 induced recession that came along in 2020.
Martin declined the offer but Tony, to his credit, put his money where his mouth is and took the bet.
The ABS data shows that rather than falling 35 per cent, Sydney prices are now 3.7 per cent above the prior peak in the June quarter 2017, Melbourne prices are 5.4 per cent above the prior peak in the September quarter 2018 while the eight capital cities measure is 6.2 per cent above the prior peak in the September quarter 2018.
So rather than falling 40 or 45 per cent, a move that would have sparked a deep and protracted recession, house prices will end 2021 around 10 per cent above the prior recent peaks.
Where to now?
The interesting thing with the current price surge is likely to tapper off quite quickly. There is already a small fall in auction clearance rates and new listing for sale are strong.
As has been well documented, our closed international borders mean that population growth has fallen to around zero. This is taking out a huge element out of demand for housing. At the same time, new dwelling construction is strong. This is adding a significant volume of new dwelling supply which in will inevitably dampen prices.
At the same time, interest rates are no longer falling and indeed, some fixed mortgage rates have edged up in recent weeks. While an official interest rate hike is still some time way, discussion of tighter monetary policy may further dampen cyclical price growth.
It is unlikely that house prices will fall over the next year or two, but the rapid price gains of the last nine months are close to being over.
A period of low or no price growth will work to boost affordability particularly with wages growth starting to lift and the labour market more generally improving.
And as for price falls of 35 or 40 per cent, you can forget it. Banks are well regulated, policy makers know what to do when economic troubles emerge and when the border do reopen, there will be a spike in demand from new migrants.