The tyranny of the recent

Human beings are pattern-recognising creatures, but not particularly good ones. We tend to take the last few months and stretch them out indefinitely in our minds. If prices rise, we assume they’ll continue to rise. If they fall, we brace for endless decline.

This is recency bias – a psychological shortcut where we place too much weight on the most recent information when forming our expectations about the future. It’s why investors in late 2022 were sure that interest rates would “stay higher for longer,” and why, just two years earlier, they believed they’d never rise again.

It feels rational because the recent past is vivid. But it’s also deceptive, because financial and property markets don’t move in straight lines – they move in cycles.

The pattern beneath the noise

To understand this, take Sydney’s long-term property record. Over the past 50 years, Sydney’s house prices have experienced bursts of rapid growth, followed by periods of stability or slight decline.

For instance:

• Between 1986 and 1988, prices surged by around 85%.
• From 2000 to 2003, they rose 77%.
• Between 2012 and 2016, another 70%.

Each boom had a familiar setup: interest rate cuts, expanding credit, tight supply, and a wave of FOMO (fear of missing out). Then, as affordability stretched and borrowing limits were reached, prices slowed or corrected — sometimes for years.

If you plot these movements on a logarithmic scale (a graph that shows percentage changes rather than dollar changes), you can see through the noise. Instead of a jagged series of booms and busts, a smooth upward slope emerges — showing that, despite short-term volatility, long-term price growth has been remarkably consistent at roughly 6–7% per year.

(In a logarithmic chart, each equal step on the vertical axis represents the same percentage change — so a 50% rise looks the same, whether prices go from $200k to $300k or from $1m to $1.5m. It’s a way of showing growth as compounding rather than raw dollars.)

This perspective reveals what short-term headlines often obscure: that the chaos of the moment usually hides an underlying rhythm.

The illusion of permanence

Recency bias traps investors in both directions:

• When the market falls, they convince themselves it will never recover.
• When the market rises, they assume it’s a new permanent reality.

Both are wrong because mean reversion is constantly at work.

Mean reversion simply means that, over time, prices and returns tend to revert to their long-term averages. If prices fall too far, improving affordability and lower interest rates attract buyers, thereby lifting demand. If prices rise too far, affordability caps and tighter credit slow them down.

It’s not about perfect balance — it’s about gravity. Markets often overreact, but they also tend to self-correct.

The latest Residential Property Prospects (RPP) report from Oxford Economics illustrates this principle unfolding in the present. After two rate cuts in 2025, national dwelling prices rose 2.1% in the past financial year and are forecast to grow 6.8% in FY2026.

A year earlier, most analysts were still predicting stagnation. Those forecasts were built on recent pain — higher rates, weaker confidence, stretched budgets. But the market, true to form, has reverted toward its longer-term mean once policy settings and borrowing power shifted.

Why this cycle is no different

We often hear that “this time is different.” But the underlying forces — interest rates, supply, demographics, and psychology — are the same ones that have shaped every cycle before.

Here’s what the data in the RPP report tells us about the current environment:

• The RBA cash rate is expected to fall to 3.35% by mid-2026, boosting borrowing capacity.
• Mortgage repayments, which peaked at nearly 48% of household income, are projected to fall to around 42% by 2028.
• Housing undersupply remains severe — about 140,000 dwellings short of what’s needed — providing a floor under prices.

This is the classic setup for recovery: falling interest rates, improving affordability, and structural scarcity. None of this guarantees rapid gains, but it does show that downturns don’t last forever. They never have.

Why mean reversion matters for investors

Recency bias makes us terrible at timing markets. We buy when optimism is high and sell when pessimism peaks — both emotionally satisfying but financially destructive.

Recognising mean reversion helps investors do the opposite. It reminds us that downturns create opportunity and that recoveries lose steam once everyone believes in them.

It also explains why property, as an asset class, is so resilient. Even when prices stagnate for years, underlying demand (from population growth, income, and supply constraints) keeps the long-term average growth rate steady. The “trendline” remains intact; it just oscillates above and below it.

The calm view forward

Zoom out far enough and you’ll see that every apparent boom and bust in Australian property is just another wave in a much larger tide.

Sydney’s current median dwelling price sits around $1.15 million, projected to reach $1.17 million by 2028. These aren’t explosive figures — but they are consistent, compounding ones.

That’s the quiet truth about markets: over decades, consistency beats drama.

The real danger isn’t missing the bottom; it’s mistaking the present for the permanent. The last six months are not the full story — they’re just the latest chapter in a long and self-correcting cycle. As always, markets, like people, respond to incentives, not memory.