Myths

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&rsquo;s copious data proving that&rsquo;s a major piece of nonsense, but some will never reject that sacred cow.

Here are some others &hellip;

It&rsquo;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 &ldquo;record low interest rates&rdquo;. It&rsquo;s a convenient way to avoid meaningful analysis.

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Here&rsquo;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 &ldquo;record low interest rates&rdquo;. 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&rsquo;s a bad time to sell because it&rsquo;s winter

Here&rsquo;s another myth that&rsquo;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&rsquo;t listing because it&rsquo;s winter and winter is a bad time to sell property. They&rsquo;re waiting until spring because that, apparently, is the best time to sell.

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It beggars belief that anyone would believe that real estate fortunes are dictated by the seasons.

Here&rsquo;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 &ndash; 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&rsquo;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&rsquo;s been under way for several years) and its main source of population growth, overseas migration, has been blocked by our closed borders.

Sydney&rsquo;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.

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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 &ldquo;The top 5 reasons&rdquo; why house prices are rising. It rolled out the usual cliches &ndash; low interest rates, population growth, tax policies, etc &ndash; 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&rsquo;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 &ldquo;a loss of momentum&rdquo;.

The media coverage resulting from CoreLogic&rsquo;s report on June price trends claimed the market is losing momentum &ndash; 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&rsquo;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&rsquo;s a mistake to make big assumptions based on month-to-month price movements. It&rsquo;s too short a time frame for meaningful trends to become apparent. The monthly movements are often erratic.

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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 &ndash; except Perth, which increased &ldquo;only&rdquo; 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.

The average punter will never let the facts get in the way of a cherished belief

Joel Robinson

Real estate myths and misconceptions: Hotspotting's Terry Ryder

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Two property groups have teamed up to debunk media myths – but have actually added to them.
In seeking to dispel misconceptions about negative gearing and capital gains tax, the Property Council of Australia and the Real Estate Institute of Australia have added to the great seething mass of misinformation about real estate.
They have also missed a clear opportunity by failing to address two of the biggest arguments in favour of negative gearing and other investment incentives. 
That’s a shame. The media hysteria around negative gearing and the CGT “discount” needs a strong and coherent response from the real estate industry.
The PCA and the REIA have sought to provide that by asking a consultancy group to put together an evidence-based examination of the issues. To a certain degree it’s been a worthy exercise because the report presents facts and reasoned analysis, in contrast to media treatment of the issues.
It provides cogent responses to some of the lies about negative gearing, using official figures to show that this is not a tax benefit to the rich, nor is it a massive burden to the Federal Budget with no benefits to society. It shows that investors do indeed contribute to the creation of new housing supply and therefore assist in making homes more affordable. 
But it adds to the problem by reinforcing the notion of a runaway national property boom with soaring prices. It refers frequently to the “current booming residential property market”, belief in which has caused the lunatic fringe to target the industry with a sustained series of irrational attacks.
It also reinforces the greatest myth in Australian real estate – the claim that a national housing shortage exists. It’s poor form by these groups to self-righteously claim to be debunking other people’s myths while re-stating their own equally-fallacious furphies.
The PCA and REIA have also failed themselves and their industry by missing the opportunity to make two of the strongest arguments in favour of investment incentives like negative gearing.
The report examines how much negative gearing costs Budgets but doesn’t consider how much other revenue would be lost if negative gearing was disallowed. If this incentive to investment was removed and Australians stopped buying investment properties (and other forms of investment which have negative gearing provisions), other revenue streams would reduce, including stamp duty (State Governments would be screaming from the high heavens), land tax and capital gains tax. 
Given that the total tax take from the property industry is over $70 billion per year, and the amount claimed in negative gearing benefits is a tiny fraction of that, what would be the overall long-term impact to all government budgets – state as well as federal – if negative gearing ended?
To my knowledge no one has addressed this because everyone is looking at the issue from their own narrow viewpoints and the big picture has been lost.
But there is a bigger issue not discussed in this “debate” – and I couldn’t find any reference to it in the REIA/PCA report. My contention is that the Federal Budget would be a massive loser long-term if negative gearing was disallowed.
Here’s why. The biggest problem for the Budget is the mounting cost of welfare, notably pensions paid to retired people. The problem will get considerably worse, because of our ageing population. Successive Governments have told Australians they have to invest to provide for their own retirement years, because the nation cannot afford to fund them with pensions.
The nation needs to provide incentives to invest. Negative gearing it one of them – and it applies to other forms of investment including shares, businesses and artworks, as well as to real estate.
If we remove negative gearing, it will have to apply across all investment vehicles, not just to real estate. It’s a reasonable expectation that if the incentives are removed, many people will not invest. They will stagger into retirement with a small amount of superannuation and a need to claim the pension. 
A small short-term saving to the Federal Budget will result in a major long-term loss.
The anti-gearing attack is based on the claims that it inflates prices and damages government budgets. There is no evidence that negative gearing results in rising prices, because it’s impossible to measure. 
What we can say with certainty that we currently have negative gearing in place and prices are not rising strongly in any of our major cities except Sydney. If negative gearing inflates prices, why is there no price growth in Perth, Darwin or Canberra, and only muted growth in Brisbane and Adelaide?
Another thing we know, from the experience of the last time negative gearing was disallowed (in the 1980s), is that it results in higher residential rents.
The true impact on government budgets will not be known until someone does a proper study which includes the impact on other forms of real estate revenue if people stop buying investment properties (and other types of investments, including shares) and those who currently own them sell them to home buyers.
My belief is that there would be a net loss to state and federal budgets in the short-term and a massive cost in the longer-term because there would be considerably fewer self-funded retirees. 
TERRY RYDER is the founder of <a href="https://www.hotspotting.com.au/" target="_blank">hotspotting.com.au</a>. You can <a href="https://mailto:ryder@hotspotting.com.au" target="_blank">email him</a> or follow him on <a href="https://twitter.com/hotspotting" target="_blank">Twitter.</a> 
Terry was recently joined by Property Observer editor at large Jonathan Chancellor for a webinar on why research is the key to successful property investing in 2015. You can download slides and audio from the webinar <a href="component/content/article?id=42796" target="_blank">here</a>.
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Property groups adding to market myths: Terry Ryder

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EXPERT OBSERVATION
The real estate industry is a rewarding and fulfilling industry to be a part of, whether you are an agent or a property manager, with real estate agents commonly working around the clock in order to get the highest possible return for a property.
Despite the hard work of many real estate agents, research indicates that there is a lingering negative perception of the industry, with only seven per cent of Australians rating the profession as either ‘high’ or ‘very high’ for ethics and honesty, the third lowest profession out of 30 surveyed.
Broadly speaking, the negative perception of the industry stems from a lack of trust between customers and agents, but there are steps that agents can take to improve the overall perception, and build trust with clients along the way.
Myth #1 Property managers do not care about the owner's property
Property managers are often perceived to only contact tenants or landlords when there is money needed, but a crucial role of the property manager is to ensure that a property is properly maintained.
This involves the management of all financial components involved, including rent and any additional expenditure that is needed for maintenance. From the owner’s perspective, expectations are that a property manager will look after their property and keep it in the best shape possible, but when repairs or upgrades are needed, owners can often be difficult to contact when money needs to be spent.
It can be a challenging job for property managers to act as the middleman to control the variables that are beyond their capacity, as there are regulations that agents must follow and comply to.
This is where regular communication with clients is a must; being confident in your knowledge and experience will filter through to a client feeling more comfortable that the property is safe in your hands. And when it comes to having conversations about additional expenditure, clients will trust that their money is being spent for their own benefit.
Myth #2 Real estate agents make a profit from the marketing fee for a property campaign 
Marketing should be considered part of the investment when selling or leasing a property, as any proposed marketing tool is for the sole benefit of the campaign, but one of the most common misconceptions is that real estate agents profit from the marketing. Every dollar used for marketing materials or tools is put towards promoting a property in order to gain more exposure and better results.
A common expectation is that an agent should cover the marketing costs, all whilst selling the property for the highest amount within a short period of time.
According to a recent survey undertaken by Pureprofile, over 90% of vendors have unrealistic price expectations. If this situation arises, it’s the property managers duty to inform and educate the client in order to set up realistic expectations from the get go. Myth #3 Real estate agents and property managers are dishonest
All real estate agents and property managers are legally bound to be honest and provide correct information without bias. An agent should never offer limited or incorrect information to clients with the expectation they would gain the business or deal.
The increase of online rating systems such as RateMyAgent and OpenAgent are instrumental in encouraging complete transparency, as any dishonesty or poor service will be exposed for all to see. These systems also provide real estate agencies with the opportunity to continuously improve their system and practices.
At the end of the day, each agency is responsible for its own agents and educating them on best practice. This not only includes legal requirements, but how to effectively build trust with clients, while managing expectations along the way.
Alain Warisadi is a Licensed Estate Agent and the General Manager at Xynergy Realty 
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