What to make of conflicting property market predictions

by Madison Utley02 Oct 2020

Over the seven months COVID-19 has been directly impacting the Australian economy, industry experts have been all over the board with their property predictions; many who came in strong, forecasting drops in value of as much as 40%, are now winding back their negative predictions to more moderate decreases. So why the swift and dramatic changes? 

According to property researcher and buyer’s agent Simon Pressley, most economists have a “default negative bias” and, as such, tend to immediately compute the worst case scenario. Further, they often look at the property market through a general economic lens rather than recognising its many unique characteristics.

“They often have a belief that property markets respond rapidly, because shares can do that, but they fail to understand that property asset values don’t change at all unless there’s a transaction,” Pressley said.

“It’s a big decision and a lengthy process to sell a property asset, whereas a share sale takes one minute. Their beliefs about the biggest influences on real estate value are far too simplistic, along with implying that people are homogeneous, that everyone’s income is the same, that everyone’s expenses are the same, and that all properties are the same.” 

Experts who predicted a downturn in property prices of between 15% and 40% were responding to the expectation population growth would completely cease and the national unemployment rate would push past 10%.

“They completely underestimated that housing is shelter – it’s the last thing that a person will give up,” said Pressley.

“They didn’t appreciate how incredibly tight the supply side already was and that low interest rates are a form of safety shield. While everyone correctly expected that sales volumes would sink, few appreciated that record-low supply, including resale stock, rental stock and new construction, meant that there didn’t need to be much activity for pressure to still occur.   

“And, as always happens, they didn’t factor in the vastly different economic profiles and growth drivers in each location, particularly capitals and non-capitals. The reality is that property markets aren’t simple at all. There are multiple influencing factors, and it’s the sum of all factors, not one factor, which triggers the action of a dominant critical mass that always dictates market performance for a chosen location.” 

Pressley stressed that there are many more factors actively shaping and directing the property market than people seem to realise.

“The only way to truly understand the complexities of property markets is to look at what every location has done over history, what happened in each location to cause the ups and downs, and to identify the common denominators,” he explained. 

“The real estate generalists quickly jump to an often-negative price fluctuation conclusion as soon as there’s a major announcement such as unemployment projection, migration policy change, or building construction change. Instead, people need to draw a more informed conclusion from the sum of all parts of a very big puzzle.” 

 

For more on this story, check out Issue 17.19 of Australian Broker – out Monday, 5 October