The various gyrations in the market over the past 12 months have made me wonder about the accepted wisdom that property prices are less volatile than share prices.

To recap, and in my opinion:

  • In July, 2019 the market was struggling after 9 months of uncertainty – elections, Christmas holidays, the Banking Royal Commission and tightening of lending criteria;
  • By February, 2020 the market was stronger than widely recognized;
  • By April, 2020 the market was reeling from Covid-19 restrictions; and
  • After May, 2020 the market entered an Indian Summer period with some surprisingly good results in some areas albeit on low volumes.

However, you will only see a muted reflection of those movements in any of the published data series.

The difficulty in assessing the volatility of the property market has many elements:

  • Statistical Methodology – we explored the deficiency of the CoreLogic data, one of the timelier series, in a previous newsletter.  By blending data from different months volatility is necessarily reduced;
  • Lack of Liquidity – Shares in BHP trade every business day – but your average house trades once a decade making it hard to measure changes in value on a regular basis.
  • Time to Cash in – Shares in BHP can be sold at a moment’s notice.  Once a decision to sell is made, it is typically 30 days or more until a sale is achieved and another 30 days or more until the proceeds of sale are received.  Investors who are pressed will sell shares before property.
  • Measurement issues – Each share in BHP is identical – so we can measure accurately the fluctuations in price over time.  Houses in a suburb are rarely identical and over time their condition improves with renovations and deteriorates with neglect – which means that measuring changes in value requires assumptions about renovations and condition.
  • Localised Fluctuations – The property markets of regions and even different suburbs can behave quite differently.  Yet this is rarely measured and city or state wide statistics of property price movements are most common – again hiding much volatility.

My view is that property prices are much more volatile than many believe.

I believe that it also makes forecasting the future more difficult.  If you are looking at historical data that is deficient then the forecasts of the future that you base on that data have to be less accurate.  In addition, we are now experiencing economic conditions without precedent.  As most of the popular forecasts are computer-based models reliant on historical data it isn’t clear to me that they have any ability to predict the future in unprecedented times?

I draw two conclusions from this:

  • I continue to believe that the damage to the underlying economy is worse than the media understands and our economy will fall by more than most commentators are predicting.  This cannot be a positive for overall property prices; and
  • The shortcomings in property statistics creates opportunities for investors that are in tune with the markets that they operate in – both to buy well and sell well.

Until next time – stay safe.

Lewis O’Brien

Victoria’s property lawyer of choice.

My expertise will improve your property outcomes.