9 December 2019
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Unemployment, recession, collapsing house prices? Not again?

Peter Switzer
20 February 2019

My old mate Roger Montgomery has made a big deal about a news.com.au story that revealed Box Hill property prices have dropped 43%. And he uses this to warn that there’s a lot of pain to come for Aussie homeowners, consumers and the retail outlets that sell them stuff. His warning is scary and the implication is that it could be a prelude to rising unemployment and even a recession!

Roger didn’t say this but, given his ominous warnings, I’m sure many readers would have thought this is what a 40% house price fall could produce.

The story intrigues me because a few years back I bought a place in Albert Park in Melbourne. Within a year, a news.com.au story told me that house prices in the suburb has spiked by 40%! When I shared this good luck story on my radio and TV programmes, I quickly pointed out that what goes up crazy mad can go down crazy mad. And that’s just what happens in all asset markets.

Tech stocks that have gone a wild ride, driven by excessive optimism, often get their comeuppance when everyone’s silly optimism turns into mad, bad and dangerous pessimism. And just as immature journalists and publicity-seeking commentators positively overreact to the boom, they then go excessively negative on the gloom.

It’s what people do when their vested interest conflicts with what the collective interest deserves.

The great Australian business journalist, Max Walsh, taught me when I was a young commentator (often writing in an opposing newspaper) that when things look terribly dramatic, history shows we generally “muddle through” and the scariest predictions don’t materialise.

This rule of thumb has served me well, so thanks, Max! It’s why during the GFC I fought with many economists I respect when they were predicting local unemployment would go to 10%. It’s why I argued with my other old mate, Professor Steve Keen, that a house price Armageddon was not in train. I even started a “Good Vibes” section on my website in late 2008 to show people that some good developments were happening that might eventually turnaround the negative stock market sentiment. I was relieved when the stock market got on board in early March 2009 and, once again, we muddled through and avoided a Great Depression.

So given our history of muddling through, let’s get real about this Box Hill price fall. A look at the chart says that in 2017, the average price was around $1.7 million. So let’s reduce this by 40%, which takes the price down to $1 million, which was the price someone would’ve got in 2014. That means three years of capital gain has been taken away. But remember, markets overreact to the downside as well as to the upside, so in a year’s time, the fall might be only 30%. And in two years’ time, it might be 25%. But it’s not really a disaster, even if you have negative equity because as long as you have a job and can meet your loan repayments, then it’s a paper loss.

BHP and Rio shareholders copped those paper losses a couple of years ago when the Chinese-created mining boom went off the boil. The surge in the housing sector helped us dodge a recession, so we need to keep all this in perspective.

And just as the stock market had to adjust in 2007-2009 with the GFC, it’s now time for the housing market to do the same. What I hate is ‘experts’ confidently telling us how bad it will be, when it’s pure theoretical speculation.

They don’t know what the RBA will do with interest rates. They don’t know whether, say a future PM Bill Shorten, will delay the start of his negative gearing and capital gains tax discount halving policies, to ensure house prices don’t fall too far and too fast. He could support mortgage brokers to make sure that banks don’t reduce the competitive loan interest rates that have come since the arrival of mortgage brokers.

We don’t know what a China-Trump trade deal will do to the global economy, stock markets, confidence and job creation. And all these can reduce the likelihood of a huge house price collapse.

I don’t know either, which is why I don’t proclaim confidently that the doomsday merchants will be wrong. I only hope that they are and point to the fact that there’s a lot of smart people who think the house price fall will be (as Dr. Phil Lowe pointed out last week) “manageable.”

I only wish my critics who seem to be praying that they’ll be right and a house price collapse happens, are manageable!

One final thing. Joe Walker from…. Came to my office yesterday to show me some interesting research that made him think Sydney and Melbourne house prices will sink by 50%. This was based on a lot of work looking at house price bubbles and busts in many countries.

He pointed out that work done by eminent economists points to the importance of looking at price rises compared to rents and when prices break crazily away from its long-term relationship with rents, it usually runs before a big price slide.

His work and his legalistic approach to an economic problem trying to work out why Australia should be any different to most other economies was interesting and very consistent with what theory says is likely to happen.

However, I was curious why his look at bubbles and busts had nothing on the UK and this chart, which I showed him was another reason to wonder if we Aussies are different when it comes to property.

This shows we had a big price slide when Paul Keating took away negative gearing, which might be an ominous warning for Bill Shorten. But then look at the big price rebound after it was reintroduced! Sure other factors were at play but the timing issue is interesting in both cases of price falls and price rises.

But even more interesting is the small fall in house prices during the 1991 recession and it followed a huge price surge that surely would have dragged prices out of kilter with rents.

I think if we avoid a recession over the next couple of years then the house price fall will be manageable but if I have to drag out the R-word in Switzer Daily, then the doomsday merchants might have their day in the rain!

I couldn’t say “day in the sun” because I don’t think they appreciate blue skies and sunshine!

And finally, for all of those out there who think I am a perma-bull, as you can see, when the data changes and the experts I respect change their views this bull will become a bear. And that’s no bull!

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