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

The first thing anyone needs to understand about the  likely events in 2011 is that rising interest rates do not cause property  prices to fall.

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.

Neil Jenman