I am intrigued at the constant doom and gloom talk around the property market, not because I have any particular view on property since what I know about property could be written on a gnats arse with a six inch nail. However, I do know a lot about markets and systems and their natural ebbs and flows. The one thing I have learned over the years is that markets go up and wait for it they also go down and in the process of doing so they display a natural volatility just as an equity curve does. As an example consider the chart below which is of car sales in Australia which I sourced from Wikipedia.
You can see that it has a flow to it – there are times when it trends up and times when it trends down. All systems respond to whatever input is affecting them and they all have thing in common – they are bi-directional they dont just go up. This understanding does seem to be lacking in the real estate industry and I think there are probably a few reasons for this.
- Recency bias – today was like yesterday so tomorrow will be like today. In simple speak most land rats and associates have not encountered falling prices because most have only been in the industry for ten minutes.
- The paucity of data in real estate does make it hard to generate continuously quoted price series. Houses are not revalued moment to moment and these prices disseminated to the market instantly. Essentially your house is worth zero at any given moment as there is no bidder for it. Your house only has a value when a transaction takes place and for the majority of homes these transactions might be years or decades apart. As a result of this any new piece of data will inevitably have discontinuities that enhance the shock of any difference. Think of it this was if you have a series of six monthly releases in price that for example go 100, 98, 94, 92. 92, 90 the move from 100 to 90 is more easily digested as opposed to having a single release at 100 and then the next release at 90. This because investors are able to anchor their price perceptions to each new price of data and the more gradual the decline the less of a shock the new anchor. This is simply a financial version of the old question of how do you boil a frog – very, very slowly…..
- Simple ignorance – people are not very good with numbers.
I have some sympathy with real estate investors because of the poor data they are exposed to, this compounded with the endless mantra of real estate never goes down and its always a good time to buy real estate simply magnifies any sense of dread investors may have. Mix this in with the usual cycle of melodramatic fear mongering generated by the media and you can see why people are getting themselves in knots.
However, the central question remains is it as bad as everyone (read talking idiot media heads) says. The only way to find out is to default to the data over the long term – not over the last ten minutes. The chart below is of the Valuer Generals median house prices for Melbourne.
If I were to view this as a share price chart I would offer the following observation. There has been a long steady uptrend with little volatility – although this is in part a function of a lack of data. Followed by consolidation in 2012 then a further acceleration and a pullback at present. I would say it looks perfectly normal as a drawdown from peak equity in 2016 of 19% is standard for any system and is to be expected in a market that has has an clean trend since 2000. A bull market of almost 16 years is not bad going – at some point you have to expect that there will be a pullback. What is interesting is that a lot of the commentary centres around the fact that the current wipe out (not my words) will be the worse since the GFC – looking at the trend above the GFC wasn’t that bad The chart below looks at the average rate of change in Australian house prices since the GFC –
There was a small blip down during the GFC and then prices exploded followed by an even longer slowing in 2011 to 2012. I put this misinterpretation down to simple idiocy the people who make these remarks dont actually research them, they simply pull them out of their arse. House prices in the US collapsed during the GFC ours did not – the rate of change in price changed.
This does raise the question of whether it is all over for property and my honest answer and it should be everyone’s honest answer is – I have no idea and I dont believe I will ever have any idea. We are once again int eh arena of prediction and predictions just tend to make people look stupid. Investing in any instrument follows universal principals – have a system and stick to it. It is your money so generate your own ideas – the instrument is in large part an irrelevancy. But always remember the law of gravity have never not worked – prices can and do go down.