Why property prices rise?

Posted on 29/04/2010  
I thought I was watching an episode of Yes Minister when I saw reports that federal and state leaders have ordered to an inquiry into why property prices rise.

It was a standing joke on the British comedy that holding an inquiry was the best way to ensure nothing happened.

And of course nothing meaningful will evolve from an inquiry into real estate prices. It’s a bit like holding a royal commission to investigate why birds sing.

It’s part of the natural order that real estate prices tend to rise over time in a strong economy, just as the sharemarket does, periodic hiccups notwithstanding.

It might make sense to hold an inquiry if something extraordinary was happening in real estate, but that is not the case.

The problem is, politicians think something extraordinary is happening. The tabloid media keeps telling them so, inspired by vested interests who know the shortest path to a headline is to say something sensationally negative about property.

The Housing Industry Association is world’s worst practice on this, pumping out rubbery figures designed to talk down the market with a grim relentlessness that would be admirable if it wasn’t so damaging. If there’s going to be an inquiry, it should be into the HIA and why tabloid media publishes its propaganda as fact, thereby misinforming the public.

Anyone who reads newspapers without intelligence will believe that the property market has been going ballistic and that prices are out of control. Extreme events, primarily at the top end of the Sydney and Melbourne markets, are being reported as indicative of property everywhere.

Every three or four years  the prestige market in our biggest cities has a feeding frenzy, during which people with more money than sense pay far too much for prestige homes. You’d expect them to have more brains, but clearly they don’t. A year later, there will be serious price decline, if historic patterns mean anything.

Meanwhile the mainstream property markets, where 90 per cent of the deals happen, is quietly chugging along, making sales at reasonable prices which tend to rise 10 to 12 per cent a year, on average, over time. Which is basically what the market has done over the past 12 months.

I’ve spent a lot of time in the past couple of weeks speaking to respected property analysts - genuine real estate specialists who understand the market, not the gaggle of publicity-hungry economists and academics that journalists appear to favour these days. Asking an economist to analyse real estate events is like asking a hockey expert to comment on the weekend’s AFL matches.

I spoke to Rod Cornish, head of property research at Macquarie Bank; Margaret Lomas, founder of Destiny Financial Solutions and author of several property books; Gavin Hegney, head of the Perth-based Hegney Property Group; Peter Koulizos, Adelaide-based lecturer on real estate investment; Brisbane buyers agent Scott McGeever; agent Jeremy Redgrove of the Real Estate Shop in Canberra; and Tasmanian valuer Andrew Peck.

The word used by many of these people to describe the current market was “patchy”. Some market sectors are strong but others are ordinary. Some auction properties are fetching prices above reserves but others are being passed in without any bids at all.

The Sydney market is the strongest across multiple sectors, following six dormant years in which Sydney has been the national under-achiever.

Melbourne has been highly active in the millionaire suburbs. Adelaide, Brisbane, Canberra, Perth and Hobart have what I would term “normal” markets. There is no frenzied activity in these places.

“It’s relatively buoyant in Brisbane but it can be a bit patchy,” says McGeever. “It’s not at all like the top end in Sydney and Melbourne. It’s an active market but certainly not out of control.”

Hegney, who runs a major valuation practice in WA, says statistical data published by research companies about Perth is “completely wrong”. He says there is an above-average level of stock on the market and “reasonable prices” are being achieved but says “it certainly hasn’t been going ballistic” in Perth.

“There are people prepared to pay a top price for a good property but it’s very selective,” Hegney says.

Lomas says there “a good healthy market” in most cities but there’s plenty of choice and no need for buyers to rush in most markets.

Despite the claims of the HIA and others prone to hysteria, there is no affordability crisis in Australia. Cornish uses a more sophisticated measure than the simplistic formula used by many and says there is a “tipping point” at which affordability starts to negatively affect market. He says we are nowhere near that “tipping point” in any of our cities, although Melbourne is closest.

The politicians who think the housing market warrants an inquiry need to take a cold shower and to become selective about what they believe in the media.

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