12 Consecutive Years of Correct Property Price Forecasts

Where Prices will go now, from the System that Gets it Right

By Lucas Meaney, August 2022

Intensified by the RBA rate hike on Tuesday, the movement of Australian house prices is a hot topic for debate, fuelled by the vast number of influential moving parts, both in Australia and abroad. This information has been fed into the system I have used to accurately predict all major movements of the Australian housing market for the past 12 years. The outputs, illustrating the next movements, are contrary to most leading opinions and highlight how finance will play a pivotal role for succeeding in the next phase.

State of disruption and uncertainty

Economists, who declared in early 2020 that property prices would plunge 20% to 30%, then saw the opposite transpire, were left largely unaccountable and are now at it again, in light of recent events, grabbing headlines with their fearmongering by way of prophesied value collapse.

And they have a lot of ammunition.?Recently, Australia has had the first change of government in 9 years and the steepest interest rate increase in 28 years.?The Labour government is focused on maintaining low unemployment, providing a raft of benefits and driving up minimum wage.?All of these measures are inflationary and thought to encourage the RBA to continue the rate hikes.?Add on top of this the international disruption in Ukraine, the US and China.?It is all making the property doomsdayers salivate.?

The Dreaded RBA Lever

Monetary and fiscal levers that are frequently pulled in attempts to maintain economic stability, during periods of disruption, play absolute havoc on the property market, which comes as a secondary consideration for policy makers.

There is an enormous amount of focus on inflation figures and much blame is cast on low interest rates, but these are misguided. Fuel, construction materials and produce cost increases have been caused by supply disruption. Electricity prices are rising as we are de-carbonising. Wages are growing due to a lack of immigration. Rents are increasing, but in many areas only returning to the market levels they were before the pandemic, as once again renters favour locations near their workplaces. Many of these factors are having a multiplier effect, such as increased transport costs, which raise the cost of everything else. ?Land prices have also increased substantially but this doesn’t actually factor into inflation.

I absolutely agree that the RBA should be increasing interest rates, because they should never have stayed at the near zero emergency rate for so long.?They need to increase to a reasonable level while the economy is strong, to provide a buffer for any future emergencies.?It also helps the competitiveness of the AUD. However, this is not justification for the unforgivable approach the RBA took of indicating no rate rises until 2024, then doing the opposite within a few months.

It is not actually monetary policy and an overheated economy that is the leading cause of the current inflation, but rather the aforementioned reasons. Therefore, interest rates are not the cause of or solution to inflation. If the RBA only focuses on reducing inflation and keeps raising rates until this happens, it will have to create a recession deep enough that demand falls so far that it actually meets the heavily disrupted supply.?This will be far worse than the temporary supply-side initiated inflation. Hopefully, enough historical stagflation events have occurred that lessons have been learned. We should all hope wisdom will prevail and the RBA doesn’t arbitrarily continue to increase rates to chase down an unrelated inflation figure.

Relying on monetary policy to be the sole solution to inflation, in the current environment, would be like taking a general anaesthetic to resolve a hangover

My system for forecasting property prices doesn’t attempt to predict the actions of the RBA.?However, given its strong influence on the Buying Power curve, I have allowed for an expectation that the RBA will continue increasing the cash rate over the coming months, but it won’t get near pre-GFC levels.?The economy and government are too reliant on low rates and there is a proven willingness, especially under the influence of a Labour government, to drop rates as soon as an economic hiccup occurs.

The Proven System

For 12 years, my system, involving the Simple Graph, is unbeaten in accurately predicting the direction of house prices in response to prevailing conditions. When identifying the last 9 key movements on the Australian Housing Price Graph in Figure 1, my system predicted each movement, as per the lettered inflection points.

At the time of my April 2020 article, Why House Prices will Rise as we Emerge from COVID-19, my explanation of what would happen to house prices was the antithesis of the inevitable outcomes being declared by most leading economists, but ultimately proved to be very accurate and arguably the best forecast for what has transpired in the housing market.

In my July 2021 article, when there was a lot of noise about the heat of the market and concerns about it turning, I correctly forecast that house prices and supply would continue to rise, at a more tapered rate than the previous 12 months, eventually stopping at an equilibrium point when Buying Power started being impacted, which is precisely what played out.

Accelerating Cycles

An important observation of the Australian Housing Price Graph and the lettered inflection points in Figure 1 is that cycles are much being much shorter.?The inflection points are getting closer.?There are many emerging trends creating this contraction of cycle timeframes including the increasing access to market information and a greater overall willingness to react to any change in forces.

Another factor that creates greater and sharper movements is the change in angle of the Buying Power curve.?This curve becomes steeper at lower interest rates, because the proportional change is greater.?This is evident in the difference between the BP1 and BP2 curves compared to the BP3 and BP4 curves, in Figure 2.

New Disruption Phase

My July 2021 article correctly forecast the movement from point G to H, illustrated in Figure 2.?Then my October 2021 article reconfirmed the strength of the market, reinforcing the upward movement of prices and volumes.

However, in early 2022, once inflection point H was achieved, representing a temporary equilibrium, stability was short lived as the world was thrown into chaos with a volley of disruptive events.

Russia invaded Ukraine. China declared it had new covid cases and was taking a zero covid policy.?The global supply chain broke down. Australian took a ‘let it run’ approach to covid. Figures came out suggesting the first signs of inflation above the target band, since before the GFC.?The US and other foreign central banks started hiking rates. Equity indexes nose-dived. Domestic sentiment dampened on expectations that the property market was over-heated and the RBA wouldn’t keep its promises.?Uncertainty set in about the potential and likely change in Government.?And large household name builders started falling over, largely due to the “profitless boom” created from misdirected stimulus with home building grants as envisaged in my?June 2020 article.?The list is exhausting.

As a result of the above, sentiment was smashed, pulling back Underlying Demand from UD3 to UD1, while also pushing upwards (and backwards) Economic Supply from S5 to S6, leading Prevailing Supply to retreat from PS5 to PS6, as presented in Figure 2.

The movement from H to I, I’ve titled the New Disruption Phase, shows volume significantly reduced, but prices marginally higher than point H.?This has not been the outcome in all markets but is true on average across the board.?This came about, even though Buying Power was at its limit and Underlying Demand reduced, largely because of the effect of increasing costs.

Also as anticipated in my October 2021 article, the threat from APRA to pull a heavy lever actually boosted activity as home buyers brought forward purchases to beat possible tightening of borrowing conditions.

Softening Phase

Towards the middle of 2022, we reached inflection point I, then the RBA started hiking the cash rate.?As illustrated in Figure 3, this has reduced Buying Power from BP3 to BP4, which is actually inconsequential for the current point of equilibrium, but the momentum of adverse influences from early 2022 has maintained the fall of sentiment, which is further pulling down Underlying Demand from UD1 towards UD4.?As this occurs, prices and quantity will contract along the Economic Supply curve from I to J.

As this Softening Phase unfolds, Prevailing Supply will shift backwards again from PS6 to PS7.?The timing of this movement is uncertain, it could take some time until Underlying Demand stabilises at UD4 and equilibrium point J is achieved.?However, given the cycles are accelerating, it may be much sooner than many expect.

The moderate contraction of prices shows how price is gradually retreating along the Economic Supply curve.?Certainly, no great falls yet and no signals of dramatic dives during this phase

This Softening Phase has started. Sentiment is unquestionably lower. Official statistics show average price falls of about 1% in both June and July.?However, this is an average, based on limited data. Real estate is an atypical market as every property is unique.?It is not a commodity, so it is not falling everywhere.

In many instances, reported price falls are actually just the result of more high-end assets trading in one period and then more lower-end assets trading in the subsequent period.?It makes sense that this is happening now. During the previous phase, opportunistic vendors were coming to market to see what they could achieve in a very competitive market.?So naturally, there were a lot of big sales of very high-end, sought-after properties.?Now, in the areas that are experiencing falling prices, the distressed or motivated sellers are more common, selling less-desirable properties at lower prices.

Many market commentators, attempting to capture attention with market-falling pessimism, will use one-off examples, such as a unit which sold for well over market, maybe because it appealed in some special way to two competing buyers at the time, against current expressions of interest for units in the same building. ??This type of statistical analysis can show huge swings in value but can’t be relied upon.

There are actually a lot of property sales which are suggesting prices for certain properties, in certain areas, are still rising.?

In my October 2021 article, I predicted that there would be a shift in the comparative price performance from houses, which had enjoyed the better performance over the prior 12 months, to apartments.?Last week, it was reported in the AFR that the Softening Phase was hitting house prices 5 times greater than units prices, in Sydney. ?This is an average in one city but shows how different types of properties will be affected differently during this phase.

Supply Deficit Phase

As per the ANZ research in my October 2021 article, there is more debt capacity amongst homeowners than there has been for several decades. Buyers are aware that they still have capacity but are currently refraining from participating during the Softening Phase.

Once the momentum of adverse influences changes and the fall of sentiment stops, much fear will dissipate.?Underlying Demand and Buying Power will strengthen with broader growth and the resumption of capital flows, bringing more capital into Australia.

When this happens, as illustrated in Figure 4, Underlying Demand will rebound from UD4 to UD1. Buyers that were holding off will realise that the falls they expected haven’t materialized to any great extent and they will all rush back in at the same time.?And very quickly, the market will go from cool to hot.

The hot market will cause Economic Supply to shift upwards again from S6 to S7 and with Prevailing Supply unable to respond in response to the increased demand, prices will have nowhere to go but straight up. Prices will continue to rise in this Supply Deficit Phase, from point J until point K when Buying Power is maximised.

The system shows that the increase in price from J to K will be much more significant than any fall from I to J. This is contrary to the view of some economists who, without a proven system to support their forecasts, claim that Australia will take a generation to recover from the evolving downturn.

Different from other Phases

This chain of phases from disruption into softening into supply deficit, resulting in price rises, is not unique and has occurred many times before.

It may seem that my system is perpetually bullish, continuously anticipating big price gains in housing. However, this is not always the case.?In a sub-market context, I predicted that Perth house prices would not rise from 2013 despite what was happening on the east coast because of the differing market forces. ?Then in late 2017, I forecast the fall from inflection point C to D as my system calculated that the effect of delayed regulation would significantly impact Buying Power which would also reduce Underlying Demand, but not Economic Supply, causing prices to drop.?It may appear that similar forces, that led to the almost 15% fall in house prices over 2018 into mid-2019, are in play right now.?However, there are many important differences to this last downturn.?

Following the 2012-2017 boom, APRA and the Banks were uncomfortable and did everything they could to tighten.?Due to the tightened criteria which has persisted since that time, the Banks don’t need to turn any screws in the current environment. Banks are far healthier than they were.?In 2018/19, there were also fears of an incoming Labour government eliminating negative gearing tax benefits. Today, Labour is already in government with no agenda regarding negative gearing, but rather a focus on supporting low-income earners and maintaining high employment, which is certain to prop up the economy.

Unless the RBA takes a hard, single-focused attack on inflation by raising interest rates until Australia is in a deep recession, which would be very unwise and hopefully unlikely, the current Softening Phase will actually have a soft landing

This view is supported by Luci Ellis, the Assistant Governor at the RBA who said that "there are no examples, internationally, of large falls in nominal housing prices that have occurred, other than through significant reduction in capacity to pay, such as a recession and high unemployment."

Consequences of the Forecast

The unfortunate consequence of the system’s forecast is that housing affordability will become worse again.?There is no correction coming to make it easier for hopeful homebuyers.

As detailed in my first publication about the Simple Graph, the Economic Supply curve does not react efficiently to other forces and, as a result, is quick to shift upwards but seldom drops.?This is the key cause of the forever worsening affordability situation in Australia.?Affordability will only be solved by the type of reforms detailed in my article proposing a better property tax along with improvements to overcome the inefficiencies of the archaic building and development industries.

The Importance of Finance

During all phases, the fundamentals of real estate will hold true. Superior properties will be more resilient to softening prices and when Underlying Demand increases, they will also be the first properties to start feeling the effect of a heating market.?Though there may never be bargains for these properties, downturns will often present the best buying opportunity, when competition is lowest.

Ironically however, the greatest gains will be achieved from less attractive properties that trade for the greatest bargains during the Softening Phase, then get swept up with everything else when the market heats up again.

Almost any properties that can be acquired or developed during the Softening Phase will benefit when prices increase in the coming Supply Deficit Phase. However, during the Softening Phase, funding for acquisition can be far more difficult and funding for development, as explained in my June 2020 article, is often unattainable. Making the funding challenge even greater, is the reality that the potential downside of applying the wrong funding structure will be magnified, as interest rates increase. ?

At Impresta, we are solving the funding hurdle for our clients, providing leading structured debt and equity solutions for development, value-add and income producing projects across Australia and New Zealand. This includes over $2bn of solutions to date and funding for over 2,000 residential dwellings.

Lucas Meaney is the Investment Director of Impresta, an advanced PropTech platform, disrupting the industry by offering a more sophisticated and efficient approach to real estate funding. The views expressed in this article are the views of the author only. This article provides general information, does not constitute advice and should not be relied on as such.