We didn't see it coming – Louis Christopher

Louis Christopher from SQM Research looks back on 2018 for the highs and lows and he admits that none of us got it right at the end of the day in that we didn’t predict that the market would fall as much as it did.
Kevin:   Always a good time for reflection, Louis Christopher from SQM Research joins us. Hi Louis, welcome to the show again.
Louis:   Good day there, Kevin.
Kevin:   Louis, let’s have a look back at 2018, as we’re doing in the show. What were, for you, the highlights or maybe some surprises? Were there any, Louis?
Louis:   Looking back, I think if someone were to tell me at the end of the last year that Sydney or Melbourne were effectively going to fall between six to 8% in 2018, I would have been, let’s say, cynical. I would have been critical of that. We didn’t think the market would fall by that much and that’s what we got wrong last year. We underestimated the downturn, we thought there was ultimately going to be one more year in it, and then 2019 would be the big year where prices would fall.
Kevin:   Yeah, interesting isn’t it, I mean all the indicators were that the only thing that really went wrong, I think, was a lack of consumer confidence Louis, would you agree with that?
Louis:   Yes, I would say there’s been a number of factors that’s been behind this greater than expected downturn in Sydney and Melbourne. The banks have got a lot to do with it, in terms of the ongoing restrictions in credit, which definitely occurred this year. There’s been a complete loss in investor confidence in the market for Sydney and Melbourne, and as the year progressed, and we got towards the second half of this year, and indeed, up until recent weeks, I think more and more investors have been looking forward to the next federal election with a view that if Labor gets up, and chances are they will, then we could see even more price falls.
Louis:   And so, when investors look at the market outlook, they’re very momentum orientated, they generally don’t buy for yield, they buy for the view of hopefully picking up some capital growth. And when the outlook’s pretty dim, they tend to hold back, and when you see the majority of the would-be investor market holding back, it becomes a self-fulfilling story in many respects.
Kevin:   Just getting back to one of your earlier comments, Louis, about the falling prices in Sydney and Melbourne in particular, have they been all that great based on those huge increases in recent times?
Louis:   Relatively speaking, when we consider that the market boom effectively started in 2013 and went through to, of course, 2017, the reach rates are still relatively small. Effectively the market in Sydney and Melbourne in particular over that time rose by some 60%, and with comeback as mentioned, now Sydney, about 9.5%, Melbourne about 7.5%. So, you’re right in that sense, but the issue of course is first time buyers who bought in 2017, 2016, and so forth, a number of them will be sitting on negative equity right now and, that’s not a pretty place to be.
Kevin:   No, well I guess it highlights the other point too. This is not a time for speculation. This is a time really to be looking at the long term Louis, isn’t it?
Louis:   That is correct. It is a good buyer’s markets and it’s probably going to remain that way for a while. One thing we can say in this correction is that values are starting to return to fair values. We’re not there yet, but they are becoming more affordable for first time buyers, and that will good over the long term. I wouldn’t of liked to see the market rally really strongly for yet another year, say for example, in 2018 or 2019. It would’ve meant that the correction would have been even bigger.
Louis:   So, it’s still quite a sizeable correction all the same, and there’s no question that buyers have been hurt, especially buyers who bought earlier this year or second half last year, they would be feeling like as though they probably made a mistake for now. But of course there are many buyers out there who definitely have that long-term view. And I’m sure for first time buyers, a number of them are quite happy they picked up a home when they found that the market previously was almost impossible to get into.
Kevin:   You talked there about first home buyers, let’s talk about investors for a moment. The intent was clear to dampen the enthusiasm amongst investors, do you think that’s been successful and was it really necessary in 2018?
Louis:   Yeah, look, I think it was necessary. I think now there are questions in terms of has it actually gone too far, and it feels like the pendulum’s completely swung from one extreme to the other. I think there’s been no question that, if you look at those years prior 2015 and after 2009, bank lending was fairly loose. It wasn’t dramatically loose, but it was pretty easy to get credit and potentially something had to be done to tighten things up, but it does feel like as though the powers of the namely, APRA, and to a lesser extent, the Reserve Bank, have probably gone a little bit too far, arguably.
Kevin:   Louis Christopher from SQM research. Louis, great talking to you. Thanks for your time.
Louis:   Good to be here, Kevin.

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