Economists and real estate just don't mix

Posted on 13/02/2015  
Economists and real estate just don't mix

Is there, anywhere in Australia, an economist who understands residential real estate?

I’m currently conducting a search. I’d like to meet her or him, if they exist. To date I have encountered in my travels myriad economists who don't have even the thinnest veneer of knowledge about residential property or what drives it. Let me know if you can identify one who knows how this industry works.

I met several last week at an event in Sydney. They all held impressive titles in major companies and institutions. None of them had the first clue about residential real estate. It was almost embarrassing to listen to them.

Here is the world of Australian real estate, through the eyes of your (very) average economist.

  • There is one market in the nation. It’s called “the Australian property market”.
  • The biggest single factor driving this one market is the level of interest rates.
  • Currently there is a national property boom.
  • The boom is driven by investor buying.

 It’s easy to demonstrate that they are wrong on every one of those counts, which tends to render obsolete any other views they express about residential property.

The latest price data published this week by the Australian Bureau of Statistics this week shows that there are many different markets in Australia and there is certainly no national property boom. The ABS data confirms earlier figures from Domain and RP Data.

Sydney’s median price rose 12% last year. Brisbane was up 5%. Every other city was 4% or less, including Perth, Canberra and Darwin which all grew less than 2%.  Even the weighted average for the eight cities is only 6.8%, a moderate growth figure inflated by Sydney’s high number.

It’s hard to construct a national property boom from those figures. But every day in major media you will read someone described as “chief economist” for a bank or other institution talking about “the national property boom”.

Every economist I meet or observe in media defines property in terms of the level of interest rates. Most see it as the sole determinant. They clearly haven’t spent any time studying residential property over the past 30 years. There are periods when sharply rising interest rates have failed to extinguish rising prices and other periods, like right now, when very low interest rates have failed to generate a widespread boom.

If interest rates were the core factor, Australia would be awash with booming markets after a  sustained period of record low interest rates. We clearly don’t have that situation – we have a boom in Sydney and a small number of regional cities.

The other big mistake made by the nation’s gaggle of chattering economists is that they think investors are driving their mythical boom.

In the simplistic mind of your average economist, if two events coincide then one must have caused the other.  There’s a property boom (they think) and the level of investor buying has risen, therefore investors must be the cause of the boom. The Queensland election result coincided with a rainy period, therefore bad weather caused the demise of Campbell Newman.

The reality is that investors never drive anything in real estate. They never lead, they follow. They’re herd animals.

Owner-occupiers continue to dominate the market, despite what you read. The most recent breakdown of property finance data I saw showed that owner-occupiers account for 61% of loans and investors just 39%.

Sydney’s boom, like most instances of elevated markets in recent Australian history, has been driven by the section of the market that no one ever talks about when looking for culprits for rising prices. They’re not local investors pumped up negative gearing, nor are they foreign investors, nor are they first-home buyers boosted by grants. All those buyer categories are minority parties, with muted influence.

The greatest chunk of the market  - now, and always – are the next-time buyers (home buyers other than first-home buyers) and they are people with the critical mass, financial capacity and motivation to influence markets and drive up prices.

The latest “chief economist” to muddy the waters with misinformation, based more on navel-gazing than knowledge or research, is someone called Paul Bloxham from HSBC. It’s a bank, I think.

Even by the low standards of Australian economists, this was a particularly flimsy effort. It was headlined “Australia’s property boom may get bubbly.” Yes, there we have it again, that strange notion of a national property boom in a country where only one city had growth above 5% last year.

According to his report, Sydney prices will fall because interest rates will rise to 2.75% … Sydney prices are over-inflated because there’s a high level of investor activity ... There’s a risk of a bubble … yadda yadda yadda. Not an original thought in the whole piece. Just the same shallow mantra sung by every economist in the land.

The notion that interest rates at 2.75% (still very low by historic standards) would precipitate a downturn is bizarre indeed. But, then, if you think it’s all about interest rates, you really have no one else to go in making a prediction.

If we could somehow prevent economists from speaking about residential property, life for real estate consumers would improve immeasurably. The national level of misinformation, the biggest single problem in the property industry, would collapse.


Terry Ryder is the founder of


« Back