Thursday, 13 January 2022 — Albert Park

By Catherine Cashmore Editor, The Daily Reckoning Australia

[3 min read]

Dear Reader,

It’s fair to say that I work with a lot of property bears.

It comes with the territory of being president of Australia’s oldest economics organisation — and one that dedicates a lot of time to advocating tax switches to lower the price of land.

The psychology is understandable. 

I mean — property prices can’t go up forever, can they?

Ask a real estate agent this question and you’ll get the standard answer.

‘We haven’t had a property crash for 30 years!’

I mean, whenever the market looks like it’s going to ‘pop’, a few more buyer grants and stamp duty cuts are thrown at it, and ‘boom’ — up she goes.

More so, if COVID didn’t crash the market, what can?!  

This is one reason why I’ve helped more than a few first homebuyers in their 40s purchase property the past 12 months.

These are the ones who have finally given up waiting for the ‘property crash we have to have’ and joined the real estate Ponzi party. 

Still, you can’t help but wonder how long can this continue?

The country’s top economists question the same.

The worst of the forecasts (I can find) comes from Christopher Joye (Portfolio Manager and Chief Investment Officer at Coolabah Capital).

He’s suggesting a 15–25% fall in median dwelling values, should the RBA lift the cash rate by 100 basis points:

‘If and when the RBA does seek to normalise the cash rate, prices should fall, as night follows day.
And if the RBA is able to lift rates by 100 basis points or more, it will likely be the largest correction on record…’

25% wouldn’t be the largest on record — but close to it.

Let’s put it in context…

• The worst property busts we’ve experienced were in the 1840s and 1890s. The 1890s outdid them all. Data shows that from 1887 to the peak in 1891, housing prices increased by 32%, only to collapse by another 31% over the next half-decade. We missed the next cycle due to it.

• Median prices remained stagnant until the early 1920s. They lifted 25% in the lead up to the Great Depression, only to fall by 26% in the downturn that followed.

• Housing prices increased by 70% from 1961 to the peak of the 18-year cycle in 1974, then fell by 16% by 1979, before the market turned.

• In the early 1990s recession, the housing market collapsed, but the median drop in Melbourne and Sydney was recorded at just over 10%.

• It was a similar fall to the recent downturn in 2018, due to the Royal Commission into the banking sector and the restraint on lending stemming from APRA’s macroprudential credit controls.

These are the most significant downturns we’ve had in Australia. But remember, median prices hide a lot.  

The median is just the middle figure of a bunch of sales.

In the 1970s downturn, for example, the 16% downturn in the median didn’t come close to telling the story of the devastation that was felt on the ground.

Agents at the time were reporting a 75% failure rate in achieving a property sale on their books. There was a dearth of buyers.  

Approvals for new dwellings fell by 7.9%.

Multiple commercial property developers went into receivership.

There was a run on some building societies, and state governments were forced to give guarantees of support for financial institutions.

It’s a familiar story.

A similar thing happened in the 1990s downturn.

The median price only recorded a 10% drop, but some properties had almost 50% wiped off their pre-crash sale price.

One thing’s for sure: you don’t want to be buying at the top!

Still, what many in the mainstream fail to realise is that all the above ‘crash’ dates could have been predicted years in advance.

This is the knowledge we teach over at Cycles, Trends & Forecasts.

It’s why we were able to forewarn the COVID-related panic six years in advance.

In June 2014, we made the following prediction (in our very first issue!):

‘Tallest buildings have a consistent habit of opening at the height of recession. They usually open empty… ‘This allows us to date the mid-cycle slowdown of the new real estate cycle just started. The half-way point of 14 years up. A 2019 peak into 2020/21 recessionary years, with 2021 the low...’

Yes, you’re reading that correctly.

At Cycles, Trends & Forecasts, we forecast a 2020 recession as far back as 2014.

And it was easy to do!

That is, if you have a comprehensive understanding of the real estate cycle — and, more importantly, the economics that sit behind it.

One person that has this same understanding is UK economist and fellow Georgist, Fred Harrison.

Fred successfully predicted the previous two property crashes years in advance: in 1991 and 2008.

In his book, The Power in the Land, published in 1983, Harrison forecast the property peak in 1989 as well as the recession that followed.

He did the same in his 2005 publication — Boom Bust: House Prices, Banking and the Depression of 2010 — successfully forecasting the 2007 peak in house prices and 2008–10 depression.

He can make these predictions because he’s accumulated and studied hundreds of years’ worth of data.

And this same cycle occurs with great predictability in Australia’s real estate market too.

If the cycle plays out as expected, there are a few years to go yet before the next property crash in Australia. 

And, in the meantime, a lot of opportunity to generate significant wealth if you know how to play the game of Monopoly.

However, be warned, a crash will come. And just as we warned readers in 2014 of the 2020 panic, our readers already know the when the next downturn will occur well in advance.

If you want access to the same knowledge — find out more here!  

Regards,

Catherine Cashmore,
Editor, The Daily Reckoning Australia