Another 40% drop in the property market? Here’s my opinion

Posted by Dr Tony Hayek

‘An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.’ Laurence J. Peter

Frankly I’m getting pretty sick of the sensationalist media reporting by so-called economists who ‘predict’ what will occur in Australia’s property market in the next 12 months. We’ve been listening to this rubbish for decades. Often their predictions are based on an extremely unlikely combination of economic factors completely failing. These obscene scenarios are unlikely, but they’re reported as the norm and used as scare tactics, targeting the general population.

Let’s take the article which was published by the Daily Telegraph on 21 February as an example. The headline gives an immediate insight into the quality of journalism and the sensationalist approach which was adopted. ‘Let the bloodbath begin’: House prices in Sydney and Melbourne ‘could halve’ in worst crash since 1890s.

The first line tells us that ‘House prices in Sydney and Melbourne could fall by up to 25 percent this year alone. LF Economics founder Lindsay David, who has been warning of the looming property crash for the past five years, said in a report today the recent house price falls were just the beginning.’

Impressively, Mr David predicted a market slow-down during one of Sydney’s and Melbourne’s strongest ever growth periods. If you can’t sense my sarcasm in that statement, it’s there – it doesn’t take a genius to follow the nature of market cycles which see a period of correction after strong periods of growth. These cycles are not just in property but in all aspects of the economy. Markets have corrected at the top of their cycle forever, long before this journalist was born. The reason they fall 10-15% after the peak of a cycle is that they were overvalued when Fear Of Missing Out (FOMO) premiums were being paid by desperate buyers sick of attending months of open homes.

FOMO premiums are a normal occurrence at the peak of a property cycle. Here’s an example of when FOMO occurs. A young couple who has spent over 20 weekends attending open homes and auctions continually being unsuccessful and outbid, they then finally find a house they fall in love with. Recent comparable sales suggest the property has a value of around $900,000, their finance is approved for $1,000,000, so come auction day rather than be outbid, frustration takes over and they pay $980,000 for the property. Fundamentally, they’ve overpaid and that 8.9% premium is what we’d consider the FOMO premium. When a market correction begins this premium is the first to fall away.

The article continues to discuss Mr David’s prediction where he proceeds to say that he wouldn’t be surprised by a fall of… you guessed it, 40%. This seems to be the figure whenever market crashes are discussed.

Here’s what I have to say. Stop scaring every day Aussies with your sensationalist bullshit. 40% drop! Please. What you’re saying is that Aussies across the country are going to sell their $1,500,000 homes for $900,000, their $1,000,000 homes for $600,000 or their $500,000 homes for $300,000. Wake up. What these economists forget is that there are humans involved. Aussies don’t dump their dreams. This is even more far-fetched when you consider the current economic environment of Australia which is nowhere near as bad as it is being portrayed by these ‘economists’.

I’d like to finish on this point. I have been in this industry for over 20 years. I’ve studied property markets for years beyond that. Markets move in cycles. Unfortunately for us, our growing reliance on technology means we’re constantly drowning in the sensationalist rubbish that is produced by media outlets.

In terms of Lindsay David, he’s one of many who in my 20 years in the industry I’ve actually never heard of. From my perspective his opinion means nothing. Unfortunately, the media just love to latch on to anyone who is stupid enough to make these outlandish predictions. It sells advertising.

Posted by Dr Tony Hayek, on 26th Feb 2019