• 15/08/2022

House price crash? What if the experts have it wrong?

James Kirby| The Australian| 29 July 2022

https://www.theaustralian.com.au/business/wealth/house-price-crash-what-if-the-experts-have-it-wrong/news-story/48139e945170d7e5405d646c949d7c67

How much have house prices around the nation fallen by this year? The chances are you’ll guess a number which is dramatically worse than reality.

The combined capital city drop is minus 0.5 per cent. Yes, you read that right, the reversal so far is teeny. So what’s with the headlines? Let’s say reports of the housing price collapse have been greatly exaggerated.

More important is what’s going to happen next. The consensus is that Australian house prices are going to drop dramatically peak to trough.

The estimates have worsened of late with a 20 per cent reversal now a common call.

But what if the consensus is wrong? House buyers waiting for the drop will be punished, investors will miss an opportunity to buy an inflation-protected asset.

Think back – the consensus said interest rates would not change for years. The consensus said oil and coal investments would be the biggest losers. The consensus view can lose you money. In fact it would be downright silly not to allow for consensus forecasts to miss the mark in the months ahead.

Figuring out what has actually occurred so far in the housing sector is the easy part.

House prices are falling – but the only significant reversals have been in Sydney and Melbourne.

The drops are worse in houses than units (usually it’s the other way around). The picture then gets complicated because several other cities are on a different cycle – they may have started their run up later (Brisbane) or they might move on factors other than rates, such as the resources cycle (Perth). Certainly, the signals for the next few months can also be read as negative.

There are compelling reasons to suggest the housing market will soften further. For example, if you take the worst data from the worst city, which is inner-city Sydney, you can extrapolate that house prices are already falling at double-digit pace

We have rates rising – stand by for another 0.5 per cent move next Tuesday. We have clear evidence that household budgets will be constrained by rising consumer prices. But here’s the thing – you can find equally compelling reasons why the house price crash may not come to pass.

Needless to say, if you want to find some data for the contrarian argument the best place to start would be the real estate industry.

No surprise then to hear property executives are more sceptical about how to interpret data and when pushed will only concede prices may fall in total by around 5 per cent. Under that scenario both investors and homeowners would risk being seriously misled by the high-profile “housing bears”.

Economist Nerida Conisbee is a property industry insider – she is chief economist at real estate agency Ray White, having worked previously with REA, Colliers and Jones Lang.

“For now we are seeing very little evidence that the market will see a sharp correction in pricing – distress is still not evident among homeowners or banks,” she says.

“Of course sentiment has shifted, but I don’t know where these forecasts declines are going to come from,” she says. “Yhe conditions are just not in place for the sort of house price declines that people are putting out there.”

Conisbee cites the lack of hard evidence to date that a serious housing downturn has arrived.

But her benign outlook hinges on a number of emerging factors: She believes the market has underestimated the impact of the post-pandemic reopening of borders for immigration which will buoy demand for accommodation especially in the cities.

She also points out that supply of housing is actually going to be slower than forecast for the simple reason that inflation and supply chain issues are playing havoc with builders – home builders are facing a 30 per cent increase in project costs. “We are seeing developers scrapping residential products, the supply of housing stock is going to remain limited,” she suggests.

Well, she would say that wouldn’t she?

Certainly the forecasts on housing from inside the property industry are less ominous than those we get from everybody else.

We might reasonably expect a more neutral view from a fund manager who is not a property market insider. The essential issue pointed out by mainstream economists is that house prices shot up by 30 per cent off the back of low rates and the pandemic rush for the safety of bricks and mortar.

As a result, the change to higher rates, a decline in consumer confidence and the end of some government grant programs will combine to hit the market.

Shane Oliver at AMP Capital captures the consensus with his view that these factors combined will underpin a dramatic house price correction. Earlier this month, Oliver reported: “We have revised our forecast for the peak to trough fall in property prices from a fall of 10-15 per cent to a fall of 15-20 per cent.”

But not everyone agrees. Emmanuel Datt is a fund manager at Datt Capital. He is not a property market insider or indeed a mainstream pundit. But he manages around $60m of investments and he’s more than ready to fly in the face of conventional wisdom.

“Honestly, I think many of the forecasts out there on house prices are nothing short of ludicrous,” he suggests. He points out that rent rises on the back of a very low vacancy rates makes residential attractive to long-term investors.

Rents are now rising at more than 10 per cent a year offering an inflation proof asset class to long term investors or those who own investment property outright.

Datt says homeowners will respond as they always do when mortgage rates move higher: That is, they will do anything but default: They will cut spending on discretionary items and shop around for cheaper deals, he says.

“This is not the GFC, this is not a recession,” adds Datt. “Household saving rates and balance sheets have improved materially since the Covid crisis.”

He estimates that around half of all households with variable rate mortgages have enough prepayments to service their current loan repayments for two years.

“Where are the factors that would give us this plunge – I don’t see it,” he says.

Who knows? Everyone is guessing. The evidence is scant to date and the jury remains out. The point is, we would be foolish to ignore the case for the defence.

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