Pascometer calls the house price bottom

Weeoo, weeoo, weeoo.

The Pascometer has sifted through the bearish data until he’s finally found  tidbit with which to call the house price bottom:

…here’s a little indicator worm that’s turned: The Sydney/Brisbane house price ratio has returned to normal.

As previously reported, Sydney house prices tend to be 1.7 times more expensive than Brisbane house prices. The ratio gets out of kilter from time to time, but then an arbitrage of one kind or another tends to bring it back.

At the June quarter peak last year, it was 2.16 when the median Sydney house sold for $1.178 million and the Brisbane median was $546,043. As suggested here in April, the 1.7 ratio was likely to be restored by one means or another, most likely a 10 per cent fall in Sydney and a little rise in Brisbane.

The November CoreLogic figures show that has nearly happened. CoreLogic says the median Sydney house was $935,713 last month. The median Brisbane house was $542,273 – a ratio of 1.726. Getting close.

The November Sydney total dwellings median price was $821,438. Brisbane was $493,041 – a ratio of 1.666.

Markets have a tendency to overshoot a bit in both directions. That consensus is for further falls in Sydney while Brisbane pretty much holds its own. The Sydney/Brisbane house price ratio of 1.7 beckons.

But that looks a bit like a forecast…

Let’s look into this a little further. Here’s the ratio expressed as Brisbane versus all capitals:

Obviously it’s true that Brisbane looks pretty good relative value right now, a point that we’ve made many times.

But there are several assumptions here that are worth challenging. First, Brisbane increasingly looks like it is going to start falling as well as credit slumps:

With sales volumes:

Moreover, such historical relationships are always hostage to long cycle breaks. If this were a normal cycle, with abundant monetary easing imminent, then we would indeed be close to a turn in prices.

But so far this cycle has been anything but normal. House prices are tumbling without any interest rate hikes. Instead, there is a structural shift in lending standards underway that particularly impacts investors which are much more concentrated in Sydney and Melbourne.

This is about to get worse as negative gearing reform arrives. Our estimate for the impact on prices from that is -10% for Sydney and Melbourne so the entire amplitude of the Brisbane prices ratio  ought to break lower by that amount too. Add an overshoot for good measure.

Finally, my estimate for house price falls is 10-15% nationally over for the first leg of the adjustment. But I see a second leg lower as the global cycle comes to an end some time in the next year or two. Or, if we get through that, as China’s economy structurally slows into the 2020s and the income recession returns with a vengeance. Both eventualities will hit an Australia with torn apart budgets and exhausted monetary policy. Brisbane would very likely also see falling prices in that scenario too.

All of that aside, the most compelling evidence for further material price falls is The Pascometer calling the bottom!

Weeo, weeoo, weeoo.

Comments

  1. His argument is that we have reached stability wrt the Sydney/ Brisbane house price ratio, therefore Sydney and Brisbane price movements will converge. It’s completely uninformative with respect to how that convergence will be achieved. Given clearance rates and stock on market remain poor, I’d guess the way they will converge is Brisbane price movements will move towards Sydney’s movements, not the other way around.

    • We will know in a month how much credibility he has.

      My only wish is that the ratio is maintained … as they link up and decline in unison. Pascoe could be proven right.

    • I recall seeing Core Logic charts which clearly showed cities and regional real prices moving in sync but with much greater volatility in the major cities. If history repeats then the convergence will happen because Sydney real prices fall a lot hard than Brisbane. i.e. Brisbane prices will still fall.

      • Seems fair – if they suddenly sync up today, and both fall a further 10%, Sydney will have fallen ~19% and Brisbane a little less than 10% (Corelogic has them up 0.13% yoy). If the syncing process takes place over a few months (seems more likely) the difference in peak to trough will greater. Seems generally in line with what you are saying.

  2. Wait for the Jan 19 avalanche of lisitngs. Happens every year, dear old mum/grandma messes up the Christmas turkey and the kids decide it’s the last straw and off to a home she goes.

  3. HAHAHA who is this guy and what is he smoking.

    House prices are down 20-35% in areas where I and other friends live in Melb eastern suburbs, and can assure you no one is bidding at auctions. Friends in real estate are in panic mode – it’s fkn epic.

    Pascoe is as credible as a gypsy fortune teller on Californian LSD.

      • toorak -22
        st kilda east -21
        armadale -20
        st kilda -16.55
        brighton -16
        caulfield -16
        south melbourne -16
        carlton -15
        fitzroy -15
        flemington -14
        north melbourne -14
        caulfield north -12
        hawthorn -12
        box hill north -11
        clayton -11
        hawthorn east -11
        heidelberg -11
        oakleigh east -11

        That data is from CoreLogic and its 3 months old so you could add another 5-10%. Ask any agent in the leafy east of Melbourne and they will confirm.

  4. Mr Pascoe is a determined contrarian and there is a lot to like about that.

    If we all say that houses prices are heading for the moon we can be sure there will soon be a stream of articles from Perma Bear Mr Pascoe promising doom and gloom.

    The Brisbane / Sydney ratio?

    May as well be comparing the water levels in Lake George to those of some lake in Papua New Guinea.

    • It’s not as irrelevant as that – there is surely a steady stream of Victorians and New South Welsh moving to Queensland to get away from the crush loading, and their budget is heavily dependent on how much their old house goes for both in practical terms and in more psychological terms of looking at Queensland prices and thinking ‘wow, that looks cheap’. At some point if Sydney declines continue, Sydneysiders are going to stop thinking ‘wow, that looks cheap’ and start thinking ‘gee I can’t afford anything better in Bris/ Gold Coas than I could at home – if everything goes right on auction day. Might as well stay put’.

      That doesn’t suggest anything about the future of Sydney house prices, though, more about the future of Brisbane/ Gold Coast houses.

      • The same could be said about any location outside of Sydney and Melbourne, including the outer suburbs.
        They always look cheaper.

        So there is always a ratio between Sydney and Melbourne prices and those other locations.

        I just haven’t heard of people tracking movements in these ratios specifically beyond the obvious – “Gee its cheaper outside of Sydney and Melbourne”

        Is 1.7 a magic price ratio that drives people to move away from Sydney and Melbourne?

        Or is the decision to move to Queensland driven by a range of other factors that have an effect on price but price itself is not the driver for most people.

        Plus if anything Brisbane and the Gold Coast don’t offer (any more) the promise of getting away from congestion and crush loading anyway.

        I look forward to more coverage and analysis of these ratios.


      • Is 1.7 a magic price ratio that drives people to move away from Sydney and Melbourne?

        Absolutey not. The point is only that people selling in Australia’s largest and most expensive real estate market and buying outside it have a non-zero effect on those other markets, and the size of the effect will be diminished if gap between Sydney and everywhere else narrows. No doubt the size of this effect is subject to change for many reasons in addition to that reason, and many hours could be spent attempting to quantify it with little return.


        Or is the decision to move to Queensland driven by a range of other factors that have an effect on price but price itself is not the driver for most people.

        I’m sure it is, and indeed the assumption behind what I said on this point above was absolutely that the impetus to move to Queensland was entirely due to reasons other than price, which only becomes influential if a fall in housing wealth means achieving the expected benefits of the move cannot be achieved.

      • Yup, interstate migration has been strong these past 18mths or so. Mind you, many of Brisbane’s ‘burbs are filling up rapidly with foreigners too.

  5. Pascoe is late to the party. Corelogic’s Lawless declared the bottom in April.

    The Sydney house average price is more than double what it was ten years ago ($408,000 to $820,000). There’s a lot more falling possible.

  6. How can an absurdly overbloated market like ours with a shiteload of leverage and current lending restrictions together with FONGO, can be done in terms of falling, beats me hands down. Economic studies should be reclassified as “Fantacy, Fiction and Delusional Story Telling” for the intellectually challenged…HE HE HE HE

  7. looking at spreads is tricky and the most common mistake I see is the thinking that “X” must decrease and “Y” must increase to close the gap (or visa-versa”). In the above example both market could fall and the spreads could close.

  8. TS Elliott had met Pascoe before:

    We are the hollow men
    We are the stuffed men
    Leaning together
    Headpiece filled with straw. Alas!
    Our dried voices, when
    We whisper together
    Are quiet and meaningless
    As wind in dry grass
    Or rats’ feet over broken glass
    In our dry cellar

  9. Don’t look at standard metrics of value…
    Pasco has identified a new, powerful ratio. Genius!
    OMFG!

    God help us

    What about the ratio of Sydney house prices to
    Kangaroos
    Holdens purchased
    Big Macs sold
    Adult diapers soiled

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