Real estate myths and misconceptions: Hotspotting's Terry Ryder
EXPERT OPINION
The average punter will never let the facts get in the way of a cherished belief.
This is why Australian real estate abounds with myths and misconceptions to which people cling, regardless of the evidence.
Last week I wrote about the belief held by many people about the importance of being close to the CBD to get the best capital growth. There’s copious data proving that’s a major piece of nonsense, but some will never reject that sacred cow.
Here are some others …
It’s all about interest rates
Another myth that pops up daily in mainstream media is the child-like notion (held primarily by economists who have child-like knowledge of real estate) that the fundamental driver of real estate prices in the level of interest rates.
In many ways this is the last refuge of scoundrels who wish to appear informed about the property market when in reality they know very little. When asked a question about real estate, the standard response is “record low interest rates”. It’s a convenient way to avoid meaningful analysis.
Here’s what passes for analysis for most economists seeking to explain real estate trends: if event A coincides with event B, then event A must have caused event B.
So if cheap finance coincides with rapidly rising prices, then that must be the cause. It overlooks the absence of growth in late 2019, also a time of record interest rates, and in the first half of 2020.
There was the same response when Sydney and Melbourne were having their boom from 2013 to 2017. The standard explanation was “record low interest rates”. Proponents of that theory were unable to explain why prices were falling in Perth and Darwin and stagnating in Brisbane, Canberra and Adelaide. Nor did record low interest rates explain the subsequent decline in prices in Sydney and Melbourne after 2017, including the early part of 2020.
The theory also fails to explain how Australia managed spectacular property booms during an environment of very high and rising interest rates in the late 1980s and early 2000s.
I suspect real estate dynamics are too complex for the average economist to comprehend. Remember, these were the people who were predicting, 12-15 months ago, a major collapse in property prices (at a time of record low interest rates).
It’s a bad time to sell because it’s winter
Here’s another myth that’s currently doing the rounds, as people try to explain why there are relatively few properties for sale at a time of feverish buyer demand.
According to media reports, home-owners aren’t listing because it’s winter and winter is a bad time to sell property. They’re waiting until spring because that, apparently, is the best time to sell.
It beggars belief that anyone would believe that real estate fortunes are dictated by the seasons.
Here’s the fundamental truth: the best time to sell is when there are lots of enthusiastic buyers competing for relatively few properties, with prices rising rapidly – i.e. right now. It has nothing to do with the seasons.
Somehow, the real estate industry has managed to convince the market that spring is the best time to sell. The same agents claim spring is also the best time to buy. Both cannot be true.
It’s all about population growth
Another popular myth is that the fundamental driver of property prices is population growth. I could spend a long time dispelling this furphy, but suffice to ask this question: how is it that Sydney house prices are rising so fast (9.5% in the June Quarter and 18.5% in the first six months of the year, according to one source) at a time when the population data is negative for Sydney.
Sydney continues to lose population to internal migration (the Exodus to Affordable Lifestyle trend that’s been under way for several years) and its main source of population growth, overseas migration, has been blocked by our closed borders.
Sydney’s losing population but its property prices are rocketing. The same is true for Melbourne, despite everything that has afflicted that city in the past year or so.
A catalyst for this column was an article in the Sydney Morning Herald and The Age (both prime sources of real estate misinformation) which claimed to present “The top 5 reasons” why house prices are rising. It rolled out the usual cliches – low interest rates, population growth, tax policies, etc – none of which in any way explains the past 6-12 months in Australian real estate.
Month-to-month price movements matter
You can be sure we’re in the midst of a spectacular real estate up-cycle when media characterises a 2.1% rise in house prices in a single month as “a loss of momentum”.
The media coverage resulting from CoreLogic’s report on June price trends claimed the market is losing momentum – because the monthly growth in dwelling values was slightly less than the previous month. There were headlines across the nation claiming that the market was running out of puff.
It’s worth noting that the same happened in early May, because the average rise in values in April was slightly lower than March. This inspired headlines declaring that the boom was over. But then the May figures showed another big growth spurt.
Now the June figures are down (slightly) on May, therefore the market is apparently losing momentum.
Specialist real estate analysts with experience know it’s a mistake to make big assumptions based on month-to-month price movements. It’s too short a time frame for meaningful trends to become apparent. The monthly movements are often erratic.
The longer-term data is more reliable and meaningful. In the June Quarter, every capital city except Perth increased their house prices by 4.9% or more. The regional markets of NSW, Victoria, Queensland, Tasmania and the Northern Territory all rose by at least 5.5%. The national average for the quarter was a rise of 6.7%.
In the first six months of 2021, all capital cities grew 10% of more – except Perth, which increased “only” 7.3% in the first half of the year. The national average was a rise of 13.6%.
The figures suggests that there continues to be serious momentum in markets around Australia, driven by multiple strong factors.