Real estate myths and misconceptions

By July 8, 2021 Market Update

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.

There is a common 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 Melbourne house prices are rising so fast (8.8% in the March Quarter and 16.3% in the last six months of the year, based on REIV data) at a time when the population growth is shrinking for Melbourne.

Metropolitan Melbourne 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.

Melbourne’s losing population but its property prices are rocketing. The same is true for Sydney, despite everything that has afflicted both cities in the past year or so.

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.

About The Author
Terry Ryder

Terry Ryder

Terry Ryder has been a specialist researcher/writer on residential property for 32 years and has published four books. In 2006 he created hotspotting.com.au, to help investors find the best places to buy. He is regularly interviewed by television, radio and print media on real estate issues, and is widely sought as a public speaker.

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