Why we don't need a Royal Commission in to surging house prices: Hotspotting's Terry Ryder

EXPERT OBSERVER

The most predictable thing in real estate is the outrage that emerges from some sections of the community whenever dwelling prices rise. Equally predictable is the willingness of mainstream media to indulge the disaffected few
who think politicians and bureaucrats should be taking action to stop the markets doing what they naturally do.

There was considerable media coverage last week of a “report” from the University of New South Wales which called for “the immediate creation of a Royal Commission” because rising prices constitute a national crisis and young Aussies are “locked out of the market”.

One headline based on this report declared: “House prices a time bomb ready to erupt in the absence of immediate intervention”.

The lead author was someone smart enough to attain the title of “professor” but not clever enough to understand the dynamics of real estate markets.

Here’s one quote that demonstrates how little the report author knows:

“Rampant price growth has returned to the larger cities and is now spreading to regional Australia. This is in part due to the pandemic-fueled work-from-home revolution but is also because so many younger Australians can no longer afford the life they want as homeowners in the larger cities.”

There are several errors in that one short paragraph, which would tend to destroy the credibility of the commentator:

1. Price growth did not start with the big cities and spread to the regions – it’s been the opposite. The regions have been leading on price growth for some time, alongside some of the smaller cities - and the big cities, notably Melbourne, have belatedly joined the party.

2. The work-from-home revolution is not an outcome of the pandemic. It’s been under way for several years and has been fueled by technology and people’s desire for a better lifestyle. Sydney has been losing population to internal migration for the past decade and Melbourne for the past four years. This is one reason why regional markets have been leading on price growth. The pandemic has provided further impetus to this trend but it certainly did not create it.

3. The statement that young people can’t afford to live in the big cities has been plucked by the professor out of his fundamental orifice. First-home buyers have been in the market in record numbers of the past 12 months, boosted by federal and state stimulus measures, and have been buying in Sydney and Melbourne as much as anywhere else. They have been leading the market and have been prime instigators of the price rises.

But, in one sense, having a major parliamentary inquiry would be a great idea because it’s a sure way to ensure that nothing fundamental will change. Royal Commissions can take years to produce a report and will provide photo opportunities for politicians, but real action is unlikely to result. Watch a few episodes of Yes Minister to see how it works.

We’ve had inquiries into the housing market in the past. The most recent federal parliamentary shallow dive into housing affordability spent quite some time giving the appearance of being serious about solving the affordability issue, before taking the easy way out by scapegoating an unpopular minority, foreign investors.

This gave governments a licence to slug overseas buyers with new taxes and charges, providing a new revenue source, while changing nothing that mattered. Affordability did not improve because foreign investors would never the problem. Nor are negatively-geared Australian investors, the other popular choice by the disaffected minority to shoulder the blame for rising property prices.

The reality is that we’ve had exceptional price growth over the past year or so, without any major involvement from investors, who collectively have been sitting on the fence for the past three or so years. They’re only now starting to come into the market.

Investors never lead market cycles – they react to them, as they are right now. Those calling for a Royal Commission into the housing market are essentially demanding an inquiry into human behaviour.

If people behaved sensibly and rationally - and did real research to develop real knowledge of real estate - we wouldn’t have the nationwide market upheavals we have every 15 or 20 years, including right now. Prices are rising at extraordinary speed because most people are essentially herd animals. They’re diving feverishly into the market because everyone else is, not because their actions make sense.

But it’s not supposed to make sense, any more than the startling highs and lows of the share market make any real sense. The smart people were buying 9-12 months ago, well ahead of the current frenzy, because they were informed and could see what was coming.

But most just follow the pack and right now the herd is stampeding. Prices are rising rapidly, but for many of our major markets it’s the first real growth they’ve shown in 5-10 years. Perth and Darwin last had a market peak in 2013 and have been in decline ever since. Now, at last, those cities are delivering some value growth to the long-suffering majority who own their homes – but self-absorbed Sydney academics would like to rob them of their long-overdue time in the sun.

Similarly, cities like Brisbane and Adelaide have been stagnating for much of the past decade. It’s not a crisis for home-owners, including those who had the foresight to buy recently, that values are at last showing some growth. The real crisis in the housing market, and the one that truly does need government action, is the chronic shortage of rental properties.

The solution to this problem is to encourage property investors to do what property investors essentially do, which is create a pool of homes available for rental. That means we want them to be out there buying properties in large numbers.

The New Zealand Government recently had a major brain explosion and essentially wiped investors out of the market by scrapping tax benefits. This compounded the earlier decision to ban foreign investors. The outcome has been a shortage of rental properties even worse than Australia’s. Australia risks making the same mistakes, if the politicians listen to misinformed academics.