Unpredictable, volatile, driven by emotion.

You may recall learning in economics that markets are efficient and governed solely by the effects of supply and demand.

This is nonsense. Especially for the real estate market.

You just need to sit in on one of our post-auction negotiations to see that at the pointy end of a real estate transaction, the decision to buy or sell is driven mainly by emotion, not reason.

Yet while markets are unpredictable, especially in the short term, they are cyclical.

They go up and they go down.

Sometimes they go up for five years straight like 2012 to 2017. And sometimes they go down rather precipitously like from late 2017 to mid-2019.

It does not take long to turn from a bull market to a bear market, and vice versa.

In 2019 the inflexion point was the election.

One week we were passing everything in and having price reductions on most of our properties. The next week we were seeing multiple bidders and price increases. Night and day. At least that’s what it felt like.

Short term volatility aside, over long periods of time (i.e. generations) the trajectory of property prices has always been up. And exponentially so.

A single fronted Victorian at 13 Rose Street, Armadale sold for $16,000 in 1975. Then $67,000 in 1983. Then $167,000 in 1993. Then $561,000 in 2004. Then $865,000 in 2011 and most recently $1,620,000 in 2017.

That’s a 10x return in 42 years, or an average annual return of almost 12% (in this instance).

Not bad! Better than the stock market… Especially when you consider you can actually live in this investment and build your life around it.

We know this. We know that historically, prices always go up over time. We know that bricks and mortar is one of the safest long-term investments. Especially when our savings are being eroded by inflation and real interest rates are negative. Cash is not king. Cash is dunce.

Yet we still panic when property prices fall, even by 10%. Even after they’ve just gone up by 30% in 18 months.

Last year was not a normal market. It was a once in a generation market. Never before have property prices appreciated simultaneously across every market in Australia, with most capital cities growing by more than 20%. Some regional and coastal markets literally doubled their median house price in a year or two.

It was never going to last.

Anyone who believed it was normal, desirable, or sustainable for interest rates to be below two percent was dreaming.

Anyone who thought that 20% annual growth in property prices was normal, desirable, or sustainable was dreaming.

Welcome to the new normal. (Same as the old normal).

So what does ‘normal’ look like for the property market, if there is such a thing?

It means mortgage rates of three to six percent.

It means houses selling within the range rather than 10 percent above.

It means clearance rates between 60 and 75 percent.

It means seeing more properties pass in than sell under the hammer.

It means lower volume and a scarcity of quality stock.

It means quality properties are still going to be competitive and sell for a premium.

It means that average properties that aren’t priced attractively are going to struggle to sell.

It does not mean that you are going to get a bargain on a great house.

It does not mean that you won’t get a great result for your home, when taken in context of the overall market.

There is no doubt the market has changed significantly in the last six months. It had to change. It needed to change.

But it’s not all bad. Uncertainly means opportunity, especially when it comes to buying or upgrading.

One could argue that a ‘normal’ market is healthier than an overheated market.

Like people, markets need a bit of balance and downtime too.

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