April 27, 2020 by Dymphna 1 Comment

What actually happened to prices in the GFC

History doesn’t always repeat, but it often rhymes.

What actually happened to property prices during the GFC?

I’m hearing a lot of people say things like, “This will be the worst market-downturn since the GFC.”

I don’t think there’s any doubt that that’s true, but I also don’t think people really understand what happened during the GFC.

I mean, if the GFC is our benchmark, it’s worth understanding what actually happened, right?

It’s not going to be the same, obviously. The Corona crisis is a very different beast. Still, the GFC does give us some insight into the way markets generally behave.

So let’s look at the data. What I want to do is zoom in on the house price index from the ABS. This is combined capital cities, and the area we’re interested in for now is in the red box.

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So we can see if we zoom in there was a quick and sharp downturn through 2008, with a relatively quick rebound. Both the downturn and the immediate rebound lasted about 18 months.

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Now, a lot of analysts are tempted to just ‘look through’ these movements. And that might be fair enough. It seems to me that this was a classic sentiment cycle.

That is, as banks were dropping like flies, people freaked out. Fear overtook the market. And the immediate falls you saw were really driven by fear more than anything.

On the other side of that you had a sharp, policy-driven rebound. The RBA slashed rates and there was fiscal support from first home buyer schemes etc. There wasn’t enough time for these things to affect the fundamentals of the market, but they were enough to underpin confidence, and ultimately drive a surge in optimism.

So yeah, some analysts have argued that this is just the sentiment cycle in play, and we should just look through it. And if you do look through it, you see property prices kind of just growing around trend – around 5% a year. That’s what the dotted line here shows:

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However, this does miss some of the point. Sentiment cycles create opportunities.

These opportunities were only available to investors who were educated, knew what they were looking for, and were finance ready.

(If you wait for the market to bottom before you start thinking about your strategy and getting your finance sorted, you’re going to miss your window.)

So let’s put some numbers on this chart to get a feel for the kinds of opportunities on offer:

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So the first point is that the fall during the GFC was pretty tame. Just 5% by the time it was done.

But even though that was a pretty tame correction, it paved the way for a large rebound.

Even though the market was ‘simply returning to trend’, it saw some investors pick up a 20% gain in just over a year.

And if they were carefully in the kinds of neighbourhoods they were investing in, they could have easily done double that.

And this is all before we get to the cheap money boom that saw prices soar 50% over the next five years.

My only point is that the sentiment cycle creates opportunities. This is the first phase of opportunities, when the herd is still figuring itself out.

And even though Corona is a different beast, I still expect we’ll see the same pattern play out this time around. There will be a fall in prices. I don’t know how far prices will fall, but I feel like I can guarantee that they’ll overshoot.

And then they’ll rebound.

That creates huge upsides for particular strategies. Particularly quick-turnaround strategies.

So this is the first phase of opportunities.

I’ll talk about the second phase in my next blog.