In early-to-mid 2020, headlines warned of a property bloodbath as big bank economists forecasted double-figure downturns as an economic consequence of the coronavirus pandemic. Now that the virus appears to be on the back foot, global communities are preparing for a post-pandemic economic rebuild. A number of property commentators have recently emerged from the woodwork to gloat about how incorrect the doomsayers were.
No doubt some doomsayers are worthy of a little push back, perhaps even some ridicule. Particularly those who have continuously predicted headline-grabbing corrections and crashes throughout their careers while property prices doubled, trebled and quadrupled around Australia and many parts of the world. This, however, is not the case for all of the so-called doomsayers of 2020. Information was changing so rapidly over this time that I found my own commentary seemed dated the moment I had submitted it to the editor. This undoubtedly applied to everybody trying to make sense of a rapidly transforming economic and regulatory landscape. I’m glad my predictions turned out to be accurate, but if you believe anybody who says they knew exactly what would happen, I’ve got a bridge to sell you.
You will find that people trying to make sense of the fallout throughout 2020 were doing so in one of two ways:
- Generating numerous hypothetical scenarios of the short-term future (e.g. unemployment rate, mortgage default, GDP growth, etc.) and making predictions on the basis of these hypothetical scenarios.
- Making it up on the spot based on things they had read, heard, felt or wanted.
One such scenario model included the Commonwealth Bank of Australia (CBA) forecast of a 32 percent drop in the house price index from March 2020 to March 2023. This was discussed at length by media outlets soon after CBA’s Trading Update Presentation in May, but little reference is made to the other commentary provided by CBA at the time. For instance, the 32 percent drop was their “prolonged downturn” scenario conditional on a 9 percent average unemployment rate over the 2020 calendar year and an 8.5 percent average unemployment rate in the 2021 calendar year. According to ABS data, Australia’s seasonally adjusted unemployment rate peaked at 7.5 percent in July. In addition, data from Seek indicates that the gap between pandemic era and pre-pandemic era job listings is closing which is good news for the 2021 unemployment rate. CoreLogic made a great point earlier in the year that in the case of the coronavirus pandemic, the impact of unemployment on the property market was determined by who was disproportionately out of work (renters working in hospitality, tourism, etc.)
So were CBA naïve to forecast such negative impacts on the house price index? No.
As can be seen (or heard) from their May presentation, CBA (and the rest of the world) were operating in an uncertain environment. Nobody knew how long it would take for a vaccine to be widely available and even the government didn’t know what future policy responses to the pandemic looked like. In addition, the CBA’s scenarios were developed to make provisions to their balance sheet, not to weigh in on the property investment debate. Similar caveats need to be kept in mind with other models, such as those of other lenders and research houses.
Adding complexity to the role of 2020 doomsayer forecasts is the inclination for their detractors to miss the link between cause and effect. Consider this: as coronavirus cases began their winter upturn in Europe, experts issued their warnings and countries took additional precautions to prevent the infection rate exponentially increasing. Soon after, some people made the statement that these precautions were foolhardy because the second wave was nowhere near as bad as experts had predicted. Many people failed to grasp the basic logic that the precautions themselves had prevented an out-of-control second wave. Frustrating, right? Well, these logical fallacies exist everywhere. Why have a military in peacetime? Because the military is a deterrent to potential invaders. Why bother continuing to eat well if you’re never sick? Because your diet contributes to your health.
The same applies to our institutions sharing worst-case scenario models.
Some of Australia’s most significant institutions made doomsayer predictions about the pandemic-induced downturn, both with respect to real estate and the broader economy. In many cases, these forecasts informed both corporate and government policy aimed at preventing such scenarios from eventuating. It is very possible that without mortgage holidays, the JobKeeper payment, RBA rate cuts, vaccine pre-purchases and a litany of other initiatives, these worst-case scenarios would have eventuated. In other words, some of the doomsayer forecasts (with the notable exception of perpetual Chicken Littles) actually accomplished their purposes perfectly.
Luke J. Graham is a property market and behavioural analyst currently completing research and postgraduate study in these disciplines at the University of Oxford. Recently, this has included work on housing affordability in major cities, the future of automated valuation models, as well as the behavioural economics of ecologically sustainable housing. He is a consultant to business leaders and property entrepreneurs in both Australia and abroad.
