Anyone got a crystal ball???

I just read an article in the real estate section of the Sunday Times (27/3/2011) by a well known and respected CEO in the Perth Real Estate industry.

The articles was entitled “US Housing Bounces Back”. I have known the author Geoff Baldwin for over 20 years from our time together at Roy Weston Real Estate (remember them?). Geoff is a mover and shaker in the industry and I respect his knowledge of real estate matters. However, on this occasion, I must disagree with some of his assertions.

Geoff has just returned from a real estate convention in the USA attended by some 5000 salespeople from 80 countries. Geoff reported that “properties in the US were now selling readily and investor activity is very strong, demonstrating a new confidence in the market and underlying the belief that prices have bottomed out.”

At this point I refer to a report from USA Today The report is headed “Home sales Fall 9.6% in Feb; median price lowest in 9 years.” Reading this report it is clear that the US housing market is still a long way from recovering and in fact values are still falling. A very large number of housing loans in the US are due to be reset in the next six months at higher interest rates and it is feared that this will trigger a new round of defaults.

Add to this the disaster in Japan, the world’s third largest economy, the current political unrest in the middle east and the escalating cost of fuel as well as depressed economies in Europe and it is clear the US economy is a long way from any meaningful recovery, despite vested interests trying to talk it up.

Back to our quote from Geoff Baldwin:

“This is important news for the Australian economy as we have historically reflected and followed US economic sentiment for the past 100 plus years.” Well that used to be the case but if we look back to the GFC and the Great Recession which followed in the United States along with unemployment at 10% plus, and house prices falling by 30% and more in some cases, the old adage that when America sneezes, Australia catches pneumonia simply does not follow in this case.

In fact on the contrary Australia’s unemployment rate only went as high as 6.5% and is now at 5% and falling, Australia is the only developed economy in the OECD which did not experience a recession, and house prices have stagnated or fallen slightly but not the 30-40% they have in Europe and America.

Geoff says in his penultimate paragraph “As the US market continues to improve(?), so too will our local market, reflected in a steady strengthening throughout 2011 and then significant upward movement in 2012.”

Well, it is clear that the US market is not improving and the market in most states in Australia is stagnant or falling. In fact it has been reported by many long serving real estate agents that 2010 was the worst market in 20 years as far as number of sales is concerned.

The fact is there has been a major shift in consumer sentiment over the past 2 years and many people are very cautious about debt. There are currently over 17,000 properties for sale in Perth against a long term average of 12,500. It is still very much a buyer’s market, but what I am hearing from a number of buyers is that they expect prices to be lower by the end of the year.

Personally I would prefer to put my trust in the general public when it comes to forecasting where prices will be in a year from now; after all, they are in the market place, every day and have a better feel for the market than our celebrity economists and real estate agents.

In 25 years I have never heard a member of the real estate industry correctly predict the market. For example, did anyone predict the 42% increase in house prices in the 2006 boom, or the 10.2% decline in prices in 2008, or the 32% reduction in the number of sales in 2010?

There are too many external factors which influence a market, whether it be the sharemarket or property market, not least of which is consumer sentiment. Consumer sentiment is so unpredictable and can literally change with the weather. As much as economists would like us believe that the direction of economic growth can be predicted using fancy and complex computer models, they leave out the one important element which overrides everything else: “desire”.

Without desire nothing happens. That’s the truth!

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