Inside Australia’s $3.8 trillion property market forecasting error

A grave forecasting error in 2020 saw Australia’s property market go haywire. Now the same thing could be about to happen all over again.


Inflation is running hot, interest rates are on the rise, and talk of a recession in Australia and around the world is reaching fever pitch. The property market has softened from the highs of 2021, and is tipped to fall further in the months ahead.

Fear and uncertainty is high. But with the huge forecasting errors from banks and the Reserve Bank (RBA) over the last couple of years, many are questioning how accurate these forecasts actually are.

At the start of the Covid pandemic in 2020, forecasters were predicting a 20 per cent drop in property values around Australia. Based on the $7.71 trillion Australian property market, this would have equated to a drop in the value of Australian property of over $1.54 trillion.

But instead, through to the end of 2021 the value of property actually increased to $9.95 trillion, reflecting a total increase in property value of over $2.24 trillion. This reflects a forecasting error of over $3.78 trillion. How did they get it so wrong?

The state of the market today

The property market around the country has softened, with national house prices down an average of 4.4 per cent from the top of the market late in 2021, with some markets like Sydney falling even further at 7.4 per cent from the top of the market.

The banks and forecasters are expecting further declines, with ANZ recently releasing a report forecasting a further 20 per cent decline in property prices before markets recover. If this happens, it would make the largest downturn on record in Australia.

These current and potential declines are largely driven by interest rates increasing at a record pace of 2.25 per cent over just the last five months to combat the current inflation crisis. These interest rate increases have added $733 to the monthly repayments on the Australian average mortgage of $622,076.

The experts are predicting rates will rise further over the months ahead, adding to the pain for mortgage holders and putting further pressure on the property market.

What drives property prices

There are a heap of factors that drive property prices, supply and demand is the foundation, but these are impacted by what’s going on in the economy, wage growth, interest rates, unemployment, household savings, inflation, and the list goes on.

But through time, the single factor that has the strongest link to movement in property prices is ‘sentiment’. It might seem a bit odd, that the biggest thing that drives what’s going on in Australia’s $6 trillion housing market is our feelings.

And here’s the thing, our feelings can change pretty quickly.

At the start of Covid, many Aussies were fearful of how things were going to play out. In between panic buying toilet paper and hand sanitiser, we occupied ourselves by imagining how the world might end, and fear levels were insanely high.

But the world didn’t end. And the property market didn’t crash, in fact it went in the complete opposite direction, with property prices rising at the fastest pace on record to the end of 2021.

The forecasters are often wrong.

Over the years I’ve heard a lot of predictions about the mythical property market crash in Australia. But, through all the economic cycles over the last few decades, it just hasn’t happened.

How to buy smart and make money

Here’s the thing – properties that were good properties 12 months ago while the property market was running hot are still good properties.

Good properties were good value then. Good properties will be good value on the other side of this current market turbulence. And in my opinion, good properties are good value today.

Maybe the forecasts will be right and the property market will soften further over the months ahead before it rebounds. If you buy a property today, it’s possible that a year from now you’ll look back and see that you could have picked it up for a little cheaper if you’d bought a couple of months sooner or a couple of months later.

But maybe they’ll be wrong again, and by waiting you’ll have missed out on the opportunity to make your next smart property move.

And either way, in my opinion, it’s highly unlikely that 10 years from now you’ll be regretting your purchase, because by then the current property market wobbles will be a distant memory.

Plan smart

If you are buying today it’s crucial you plan smart.

You need to make sure you’re ready for interest rate rises. You need to be prepared for economic uncertainty. And you need to be confident the property you buy is one that will perform well over into the future.

It’s critical you’re able to afford your property and live the lifestyle you want in the short term, so you’re able to continue holding your property until you get the gains you’re after.

This means your planning needs to be rock solid.

Any time you buy a property, or make any other big investments for that matter, you should make sure it fits well with the other things going on with your money.

To start, get clear on your income and expenses and what you have leftover. Then think ahead about what might change with your income or spending, something particularly important if you’ve got changing costs around things like childcare or schooling costs, or larger expenses or financial commitments coming up.

This gives you a baseline where you can see how the future is likely to play out if you keep doing exactly what you’re doing today. You can then look at how your property fits, making sure you can comfortably afford your mortgage payments and ongoing property costs.

Given interest rates are on the rise, you should make sure you can still afford your mortgage repayments when rates increase – something that’s good practice regardless of whether rates are rising or falling.

Assuming it all fits, you then need to buy a good property. I don’t have a crystal ball, but what I’ve noticed in the current property market is that not all suburbs are being affected equally.

Today I’m seeing premium properties in premium suburbs holding their value better than others, and recent data confirms that the top end of the property market is still growing while other areas are falling. Choosing a good property in a good area will mean that even if the market continues to fall you’ll be impacted less.

This planning and the decisions you make here can be complicated, but the value to you in getting them right will be measured in the hundreds of thousands or even millions of dollars – think about getting some good professional advice to help you make the best choices and get the most out of your investment.

The wrap

In Australia, we love property. We love buying it. We love owning it. And we love talking about it. Everyone has an opinion about property, and everyone thinks they are an expert. But the reality is that nobody really knows where the property market is going from here.

But one thing we do know is that we live in a good country with a strong economy, where property is in strong demand. There’s money to be made by those that play smart, and getting this right will mean coming out of this current period of disruption in a stronger position than you are in today.