You can't pick it!

It’s been obvious over the past few years that assuming the real estate market will behave in a particular way is fraught with danger and, given their credentials, it leaves the prophets that partake in these activities in a vulnerable position.

But they persist and, more often than not, get it wrong.

Below, Ray White’s chief economist has gone out on a limb to outline what she thinks the flawed practices are that get us scratching our heads when the unforeseen occurs. Let’s hope the soothsayers take it on board!

1. The assumption that house price movements are consistently driven by the same things

House prices are more sensitive to some things than others. There is a tendency to over emphasise one factor over another. In the most recent cycle, the main thing that many got wrong was putting an over emphasis on interest rate changes but ignoring housing shortages and population growth.

2. The assumption that what drove prices up will also push them back down

What drove prices up doesn’t necessarily drive them back down again. During the pandemic, Australia lost people to overseas and population growth was very low. At the same time, prices increased dramatically primarily because the cost of finance was so cheap and people weren’t spending as much on other things. As interest rates started to rise, many assumed that prices would move back in the exact same direction. While this happened a bit, the bounce back in population growth prevented a dramatic fall.

3. Assumption that all housing markets are the same

House prices can be falling in one city but increasing in another. Even more locally, this can happen in adjacent suburbs. Different markets have different drivers. Cities like Perth are more sensitive to the commodities cycles, whereas Melbourne and Sydney move more closely with interest rates. Head to small regional towns and the addition of a new employer or a strong agricultural year can make a difference. At a very localised level, a new cafe or new form of public transport can drive up prices.

4. The perception that house prices swing around dramatically

The cost of transacting and the speed of sale and settlement make housing a far less volatile investment to easily traded shares. This makes house prices far less volatile to a change in conditions.

5. They look at housing markets in the same way as financial markets

Financial factors do drive housing markets but demographic change is also a factor. In fact, many changes to property markets beyond residential are heavily influenced by changes to the way people live and work. Shopping centres can do well in a poor retail trade environment if there is strong population growth. Industrial property is doing well because of changes in the way we are shopping.

6. The lack of understanding of the consumer response

Building a model to forecast house prices is difficult. A simple model utilising population growth, number of dwellings and cost of finance will ignore a lot of what drives consumers when buying and selling homes. Selling the family home is a big deal and spending on other things will be reduced first before selling. This cycle, many investors have not sold because rents have increased, helping with mortgage payments.

7. The underestimation of long term trends

Long term preference changes drive property markets. The pandemic led to the highest movement to regional areas ever recorded, leading many to believe that regional pricing would come back down quickly as pandemic restrictions faded. This hasn’t happened and reflects that this regional movement was already happening prior to the pandemic. It also reflects that it wasn’t just pandemic movement that led to price rises but strong performance in mining and agriculture.

My two cents……….Spring traditionally experiences an uptick in properties hitting the market. We expect this to be the same this year and with the economic situation deteriorating for many households there will also be an increase in property owners feeling compelled or inclined to sell. This will undoubtedly lead to a softening of home values; the extent to which is anyone’s guess.

On the ground

Auctions continue to be well attended and active. Buyers keep telling us “there is nothing out there to buy” but this is starting to turn around, albeit very slowly. The winter months are generally leaner when it comes to property listings and although the past few months have seen strong demand and sale prices, properties are starting to take a little longer to sell.

As we know, spring is often regarded as the peak selling season but remember that your competition when selling your property is other sellers. Every day can bring another property on the market so why wait? If you are thinking of selling, my strong recommendation would be to prepare now.