This article appeared in the Australian Financial Review.
Everyone loves a contrarian position, and I enjoy betting against conventional wisdom. It is hard to find a more emphatic and universally held belief than the consensus view that Australian house prices will slump sharply by anywhere between 10 per cent (Commonwealth Bank), 20 per cent (AMP) or 30 per cent (numerous others).
This is, after all, the Great Virus Crisis (GVC): a one-in-100-year shock that the Reserve Bank of Australia judges will drive double-digit unemployment. House prices will only fall 5pc or move sideways.
So I will repeat what I have publicly and privately advised the many folks who have inquired about my forecast for the $7 trillion-plus residential real estate market: home values are unlikely to fall materially and, in my central case, will either move sideways or at most fall by up to 5 per cent over the next three to six months, after which the robust cyclical boom will resume.
After calling strong house price growth and the ensuing bubble between 2013 and 2017, predicting a 10 per cent correction in early 2017 when prices were climbing, and then forecasting a 10 per cent recovery in April 2019, I remain confident that this cycle will deliver total capital gains of between 20 per cent and 30 per cent.
Yes, I know some hate the fact that I have the temerity to highlight these victories over, variously, the perma-housing bulls and bears, depending on what point of the cycle we are in. Yet I have learnt the hard way that unless I carefully restate these views, critics will distort and cherry-pick them for their own purposes.
So, for the avoidance of doubt, let me reiterate that if Australia was about to experience a multi-year downturn precipitated by China imploding or high inflation and rising interest rates, I would expect a 20 per cent to 40 per cent drawdown in the value of our bricks and mortar powered by the mother of all deleveraging processes.
But that is not where we stand today.
In February, this column warned that unless central banks quickly cauterised the GVC with unconditional quantitative easing and liquidity support, we would experience savage market failures. In particular, an international liquidity crisis that rapidly became a huge public and private solvency problem. While the central banks surprisingly dithered for weeks, and the price action sadly played out as predicted, we eventually got all of the monetary and fiscal policy stimulus markets needed.
The next big intellectual question was the likely course of the virus.
Whereas some epidemiologists advised politicians that the peak in new infections would not be for months, and most Australians would get infected, our empirical forecasting models projected peaks in Australia, the US and Europe in early April.
It turned out that new infections in Australia peaked on March 28 and they started rolling over in the US on April 11. Most of Europe had reached the zenith by the middle of the month.
These insights guided our view that Australia would pivot away from the proposed “six-month business hibernation” plan – which would have been catastrophic – towards an early exit from containment after a one- to two-month lockdown.
Prime Minister Scott Morrison appears to have pragmatically embraced this logic after his stunning success in flattening our infection curve, with “Operation Kickstart” slated to begin some time in May.
This is important for the housing market’s trajectory too. A one to two month lockdown followed by an assertive effort to get workers back into their jobs will minimise the quantum of mortgage arrears and losses.
In this crisis, unemployment has also risen most noticeably among the casualised, non-home-owning labour force. Combined with the fact that the banks have been given the green light to offer six-month repayment holidays without having to hold more capital against these loans or report them as arrears, we are unlikely to see large swaths of forced sellers.
Because almost all borrowers are on variable rate loans or short-term, fixed rate products, Australia’s housing market is one of the most interest rate-elastic in the world. The prospect of multiple RBA rate cuts is what motivated our call for a 10 per cent increase in prices in April last year.