If you have been paying close attention to property news recently, you would have seen plenty of coverage of the “Boom and Bust” report from veteran analyst Louis Christopher.
Louis is the Managing Director of Research house SQM, which produces a lot of useful real-time data, like vacancy rates, rental yields and auction clearance rates.
Each year Louis produces a “Boom and Bust” report, which looks at the prospects for the year ahead in Australian residential property.
His main outlook for 2024 is decidedly gloomy.
And the news media - who love a bad news story - have lapped it up.
The “Base Case”
SQM’s so-called “base case” - that’s what it regards as the most likely outcome - sees a small fall in house price values or very weak growth in our major cities of between -1 to +3 per cent next year.
At face value, that doesn’t sound horrendous, but if you look more closely at that prediction, it’s based on prices only going up in two cities; Perth (+5% to +9%) and Brisbane (+4% to +8%).
“For much of the rest of Australia, the sharp deterioration of housing affordability, driven
by ongoing interest rate rises which are now (in SQM’s opinion) at restrictive levels, plus an
anticipated slower economy, will see a modest to moderate correction in dwelling prices take place in Sydney (-4% to 0%), Melbourne (-3% to +1%), Canberra (-8% to -4%) and Hobart (-7% to -3%)”, Mr Christopher says.
“Adelaide (0% to +3%) and Darwin (-3% to +1%) are anticipated to remain steady or record a minor rise/correction.”
The “base case” scenario anticipates a Reserve Bank cash rate of between 4.1% and 5%, population growth slowing, and unemployment rising to between 4.5% and 5.5%.
The “Really Bad” case
But wait, there’s more…
“Housing price falls could be more acute if inflation were to accelerate to the point of forcing the Reserve Bank of Australia to lift the cash rate beyond 5%,” Louis Christopher adds.
“To this end, SQM has built out a scenario based on a second energy crisis, driven by current events in the Middle East.”
That would see national house price values fall up to 3%.
“Such a scenario would force the RBA to lift interest rates more aggressively over 2024 and very likely trigger a sharp recession for Australia.”
Under that scenario, prices in Sydney could fall between -6% to -2%, Melbourne -7% to -3%, while Hobart and Canberra could dip to a whopping -9% and -10% respectively.
Brisbane (+1% to +4%) and Adelaide (-3% to +1%) remain relatively stable, with only Perth (+5% to +9%) experiencing strong growth.
Previous predictions
When looking at any analyst's forecasts, it’s worth taking a look at what they’ve said in the past.
And you don’t have to go back very far. It was only in January this year that Louis Christopher was predicting that an RBA cash rate of 4% (it’s now 4.35%, and one major bank is predicting rates will reach 4.6% early next year) could be the “tipping point” for a property market crash.
“If we were to see cash rates start to go over 4%, or even at 4%, then the risks start to exponentially rise of major stress in the housing market to the point where we would see a significant rise in default activity, would see a significant rise in forced selling activity as a result, and that would put further downward pressure on housing prices,” he was quoted as saying by Forbes.
Back in the real world…
Well, we went through the 4% “pain barrier” in July when the RBA hiked the cash rate from 3.85% to 4.1%, and there was no big rush of distressed listings onto the market.
In fact, much of the talk about “mortgage stress” and people “falling off the fixed rate cliff” has been shown to be overblown hype.
Commenting on the RBA’s latest Financial Stability Review in October, the Financial Review’s Economics Editor, John Kehoe, wrote:
“About 5 percent of variable rate owners occupiers are earning income that is less than their combined mortgage payments and essential living expenses, up from 1 per cent in April 2020.”
Now I genuinely feel for that 5% of borrowers who are experiencing genuine hardship.
But the simple truth is that most Australians paying off their homes have healthy savings buffers and can afford higher repayments.
One of the former Reserve Bank Governor Philip Lowe’s favourite responses when asked about “mortgage stress” was to point to the extraordinary $300 Billion in extra savings that Australians had socked away since the onset of the Covid-19 pandemic.
And what about the new record in home values?
It’s also worth noting that national home values - as measured by CoreLogic - reached a new record high on the 22nd of November.
I wrote about that here: (Australian home prices reach a new record high)
That’s despite interest rates being at their highest point in nearly 12 years.
CoreLogic’s Tim Lawless says that the new high “may seem counterintuitive, given high-interest rates, deeply pessimistic levels of consumer sentiment and high cost of living pressures, however, the recovery can be explained by an imbalance between supply and demand."
And that - not interest rates - is the key to home values.
Quite simply, there aren’t enough homes in Australia for the people that want to buy them.
Ironically, Louis Christopher actually addresses this - in a third scenario in his “Boom and Bust” report.
One that he entitles “VERY STRONG POPULATION GROWTH” (his emphasis).
That sees a much more optimistic outlook where home values in both Sydney and Melbourne would grow by up to 3%, Adelaide by 7%, Perth by up to 9% and Brisbane by as much as an eye-watering 11%.
It’s notable that Mr. Christopher didn’t talk about “Scenario 3” in his media appearances to launch his new report, preferring to play the role of doomsayer.
In fact, the press release for “Boom and Bust 2024” was headlined “Sydney and Melbourne Housing Prices to Fall”.
What’s in a name?
There’s one more thing about the “Boom and Bust” report.
I hate the name.
Why?
Because it’s not really accurate.
While Australian residential property has had plenty of booms, since the Second World War it’s never had a true “bust”.
An examination of historical data by CoreLogic shows recessions and economic slowdowns over the past three decades have led to only moderate falls in property prices, before a significant upswing as the economy recovers.
The data clearly shows that since 1996, there have only been four periods where there’s been negative house price growth over the previous 12 months - what property analysts call “year-on-year growth”.
Let’s compare this to figures of historical stock market crashes compiled by the Australasian Accounting, Business and Finance Journal.
Between September 1987 and February 1988, the All Ordinaries Index (which tracks the performance of the 500 largest companies listed on the Australian Stock Exchange) shed a massive 49.42%.
It took six years to recover all those losses.
Then just before the GFC hit in late 2007, the All Ordinaries Index reached a record high of 6873.2 points.
It then lost 55.03% to reach a low of 3090.8 points on March 10, 2009.
How long did it take to recover all that lost ground?
More than 10 years!
More recently, during the coronavirus pandemic, the All Ordinaries Index had its steepest-ever crash between February and March of 2020, losing approximately 39.24%.
It took more than a year to recover all that lost ground.
Now that’s a boom and bust scenario!
As for Australian residential property?
Boom - yes, bust - no.