Could house prices be a leading indicator of economic recovery?

Of all of the embarrassing economic “forecasts”, the worst were written around the COVID-19 pandemic.

All of the major banks tried to outdo each other on the depths property prices would fall – with the “winners” all pushing for price declines of 20% a year or more.

It is now history that the banks were in the right ball park – they just got the direction entirely wrong.

Using the latest CoreLogic figures, Sydney property values rose 0.9% in November, to be up 25.8% over the past year, while Melbourne rose another 0.6% for November to bring up a 16.3% rise for the year.

Australia-wide, values rose 1.3% in November and 22.2% for the year.

The bad news for property bulls – if there is any – is that the pace of growth is slowing with an increase in home listings giving buyers more stock to choose between at the same time as affordability becomes more stretched.

How could the experts get it so wrong?

So how could all of those highly trained economists have got it so wrong?

Indeed, more than 40% wrong, which is a seriously big chunk of change when you are talking about house prices in the millions.

Well, it is not all their fault.

All of those years they spent training as economists would have taught them exactly the folly of making forecasts, only to have all of that training usurped by the need to produce catchy headlines on newsletters that will hopefully get more attention than the next bank’s offering.

That is particularly the case when you are predicting a change in direction for a market or commodity, with the most reliable estimate often being a simple graph extrapolation from the current numbers.

Pandemic produced conditions opposite of those expected

It is also worth remembering how different the circumstances of the actual pandemic were compared to the predictions around them.

Most estimates were that the pandemic would produce economic devastation.

Instead, a lot of economic stimulus arrived in the form of government payments in lieu of pay cheques, along with the lowest interest rates in living memory.

What also arrived was the reality of working at home (if you were lucky) and staring at the same four walls during long-term lockdowns.

If ever there was a recipe for housing discontentment, this was it as the inadequacy of the “home office” was laid bare, along with the impossibility of “educating’ children remotely and keeping an internet connection functioning amid all of the strain.

All of a sudden, the inadequate heating or cooling or lack of outdoor space that didn’t matter because you were at work most of the day became a real issue.

At the same time as all of this discontent was building, the supply of houses and units was constrained by the difficulties of building, selling and inspecting during a pandemic and the discontent was raging along interstate and country lines as well.

If you have to check out a house online rather than in person, why not look at one on the Gold Coast or in the country to see what is on offer?

That had the effect of driving prices up quickly as cashed up interstate buyers started to pounce on relative “bargains” in other markets.

Vaccines arrived relatively quickly

On the virus front, the vaccines arrived much faster than expected – even if Australia’s supply was slower and later than it could have been – so there was plenty of hope for a fresh start, even as the economy went backwards.

Add in record savings rates which have continued at around 20% of incomes and you have the perfect storm for a property boom – one which eventuated, but now appears to be slowing down a little.

It is a fairly remarkable result, given that the actual economy contracted by 1.9% in the September quarter – not something normally associated with a housing boom.

Was housing first boom before the economy followed?

One of the interesting ideas is that the boom in the housing market could have been a leading indicator of returning confidence in the economy, which may now get moving as mobility increases (outbreaks and viral variants willing), consumer spending rises, savings likely decline and labour shortages and inflation push wages higher.

Interestingly, the very ingredients that pushed the property market higher are now on the wane.

Fixed mortgage rates have been rising to the extent that none of the big four banks now offers a rate below 2%.

The amount buyers can borrow has been constrained by bank regulators who are trying to ensure that new borrowers can cope with rising interest rates.

Even that most reliable of banks and the one with by far the most lenient borrowing conditions – the bank of mum and dad – is probably getting close to being tapped out as property prices rise ever higher.

That leaves us back in familiar territory, with some banks now cautiously suggesting that property prices might slow from here on and perhaps even drop a little in 2023.

Like all economic predictions that should come with a giant asterisk warning about extrapolating from graph points but it is probably not a bad guess.

Let’s all hope that the rosier economic forecasts associated with housing being a leading indicator of activity also come to pass – but you wouldn’t want to bet your house on it.