From early to mid-2020, headlines warned of a real estate bloodbath as economists at major banks forecast double-digit declines as an economic consequence of the coronavirus pandemic. Now that the virus appears to be receding, communities around the world are bracing for post-pandemic economic reconstruction. A number of real estate commentators have recently emerged from the woodwork to rejoice at the inaccuracy of the prophets of doom.
Without a doubt, some doom prophets deserve a bit of hindsight, maybe even a bit of ridicule. Particularly those who have continually predicted fixes and crashes that have made headlines throughout their careers as real estate prices have doubled, tripled and quadrupled in Australia and many parts of the world. However, this is not the case with all of the so-called doom prophets of 2020. Information was moving so rapidly during this time period that I found my own comment to sound dated by the time I was doing it. had submitted it to the editor. This undoubtedly applied to anyone trying to make sense of a rapidly changing economic and regulatory landscape. I'm glad my predictions turned out to be right, but if you believe someone who says they knew exactly what would happen, I have a bridge for you to sell.
You will find that people trying to figure out the fallout throughout 2020 were doing so in one of two ways:
Generate many short-term future hypothetical scenarios (e.g. unemployment rate, mortgage default, GDP growth etc.) and make predictions based on these hypothetical scenarios.
Catch it up on the spot based on things they had read, heard, felt, or wanted.
One of these scenario models included the Commonwealth Bank of Australia (CBA) forecast of a 32% drop in the March house price index. 2020 through March 2023. This was discussed at length in the media shortly after the CBA Trading Update was presented in May. , but little reference is made to other comments provided by ABC at the time. For example, the 32% drop was their 'prolonged downturn' scenario conditional on an average unemployment rate of 9% in calendar year 2020 and an average unemployment rate of 8.5% during the year. of calendar year 2021. According to ABS data, Australia's seasonally adjusted unemployment rate peaked at 7.5% in July. Additionally, data from Seek indicates that the gap between pandemic and pre-pandemic era vacancies is narrowing, which is good news for the company. 2021 unemployment rate. CoreLogic pointed out earlier in the year that in the case of the coronavirus pandemic, the impact of unemployment on the real estate market was determined by who was disproportionately unemployed (tenants working in hospitality, tourism, etc.)
So was the ABC naïve in predicting such negative impacts on the House Price Index? No.
As can be seen (or heard) in their May presentation, the ABC (and the rest of the world) was operating in an uncertain environment. No one knew how long it would take for a vaccine to be widely available and even the government was unsure of what future policy responses to the pandemic would look like. Additionally, the ABC's scenarios were crafted to fund their balance sheet, so as not to weigh on the real estate investment debate. Similar caveats should be kept in mind with other models, such as those from other lenders and research houses.
What complicates the role of catastrophic forecasts for 2020 is the tendency of their critics to miss the link between cause and effect. Consider this: As coronavirus cases began their winter recovery in Europe, experts issued their warnings and countries took extra precautions to prevent the infection rate from rising exponentially. Soon after, some people said these precautions were reckless as the second wave was nowhere near as bad as experts had predicted. Many people failed to understand the basic logic that the precautions themselves had prevented an out of control second wave. Frustrating, isn't it? Well, these logical errors exist everywhere. Why have an army in peacetime? Because the army is a deterrent for potential invaders. Why bother to keep eating well if you're never sick? Because your diet contributes to your health.
The same goes for our institutions sharing worst-case scenario models.
Some of Australia's most prominent institutions have made catastrophic predictions about the pandemic-induced downturn, both with respect to real estate and the economy in general. In many cases, these predictions have informed both corporate and government policy to prevent such scenarios from occurring. It's very possible that without the mortgage holidays, the JobKeeper payment, the RBA rate cuts, vaccine pre-purchases and a litany of other initiatives, these worst-case scenarios have happened. In other words, some of the catastrophic predictions (with the notable exception of the Perpetual Chicken Littles) actually served their purpose perfectly.
Luke J. Graham is a real estate market and behavior analyst currently conducting research and postgraduate studies in these disciplines at the University of Oxford. Recently, this has included work on housing affordability in large cities, the future of automated assessment models, as well as the behavioral economics of environmentally sustainable housing. He is a consultant to business leaders and real estate entrepreneurs in Australia and abroad.
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