Paul Wrigley comments on this article from Neil Jenman.
Paul agrees with Neil. Real estate is all about supply and demand. Right now there is a huge demand from buyers and tenants and a short supply of properties for sale and for rent
You can be forgiven if you believe otherwise because media keeps telling us that the market declined in the second half of 2010 because of interest rate rises and that next year will be subdued because interest rates will rise further.
That kind of simplistic and inaccurate commentary is what passes for analysis these days.
Research going back 30 years shows there is little correlation between rising interest rates and falling property prices. It indicates that the housing market is not nearly as sensitive to interest rate increases as most people seem to think. (What does influence housing markets is the level of public confidence.)
The problem is the simplistic nature of analysis in Australian real estate. When two events coincide, it is assumed by everyone that one has caused the other.
Here’s an example from early 2009. A sharp increase in activity at the lower end of the housing market coincided with the boost to the First Home Owners Grant. Because those two events ran parallel to one another, pretty much everyone assumed that the grant caused the market the rise.
It was quite illogical to make that assumption – and it was disproven by a number of research surveys – but economists, real estate agents and journalists all accepted the assumption as fact.
It was overlooked by most people that the rise in the bottom end of the market also coincided with lower prices and cheaper money – i.e. a dramatic improvement in affordability.
Even at the peak of first-home buyer activity – around April-May 2010 – first-time buyers comprised only a quarter of buyers. That means over 75% of people buying, mostly at the lower end of the market, were not receiving the FHOG or any of the State Government benefits available to first-home buyers.
Research surveys conducted by several industry organisations found it was the dramatic (and brief) increase in affordability that prompted people to buy. Only a small percentage felt the FHOG boost was their major motivation.
Because so many commentators claimed the FHOG was responsible for the market upsurge, they further assumed – and loudly predicted in media – that the market would decline and house prices fall when the boost was phased out late in 2009.
History shows how wrong they were. The market in many locations rose even more strongly. The reason the second assumption was wrong was because it was based on the first assumption, which was also wrong.
It’s a sad truth of our media-dominated lives that if a lie is repeated often enough people will come to accept it as the truth.
So now most people accept it as fact that rising interest rates suppress property prices. No one produces any evidence to prove that contention, largely because the evidence tends to show the contrary.
The Reserve Bank usually gives us interest rate rises when the economy is pumping on all cylinders, business and consumer confidence is high and people are spending big.
When that’s happening, people generally assimilate a rise in interest rates and carry on regardless. My research shows several periods in recent times when rising interest rates have coincided with house prices rising at a faster and faster pace.
The recent slowdown in some of our property markets (it’s simplistic and incorrect to suggest the market has stopped in all locations) followed a spate of interest rate rises, so again there’s an assumption that one caused the other.
This line of thinking overlooks other events that have coincided with the slowdown in some of our major city markets: the toppling of Kevin Rudd as Prime Minister (which jolted many Australians), the calling of a Federal Election, the indecisive result from that election, constant media speculation about big increases in interest rates, negative campaigns run by the mining lobby and the developer lobby, speculation by a host of inexpert commentators about the level of Australian house prices – all events that have impacted public confidence.
Right now people are declining to spend and retailers are doing it tough (witness the number of major retailers who had sales before Christmas!). Buyers are reluctant to commit to property purchases, with so much media speculation about falling values next year.
I recently read an article that blamed the current problems in the Gold Coast market on interest rates. The Gold Coast’s market issues have nothing to do with rates – it is one of the poorest performing markets in Queensland because of its ongoing over-supply at a time of poor economic performance. Tourism and construction are both in decline and population growth has fallen away – resulting in low real estate demand at a time of high supply.
These problems are exacerbated by the way news is constructed these days. So many media stories are generated by press releases from vested interests, not by investigative journalism. Many individuals and organisations with political campaigns to run – or simply a thirst for publicity – know they can gain media exposure by saying something sensationally negative.
Media publishes press releases with little scrutiny and the contents are accepted as fact by the public. This had led to a number of furphies being accepted as truth – including the mythical “housing shortage crisis”, the lie that typical first-time buyers pay an average $540,000 for a first home in Australia, and the notion that the prime millionaire suburbs provide the best capital growth.
The claim that rising interest rates will cause house prices to fall is simply that latest of them.