Property myths – Part 1

Here are eight property myths. 

These types of things are often thrown at me during question time when we are giving market outlook presentations; or are used to denigrate something we have said or written.

If I was writing lyrics, I would go for something pithy; “property, platitudes a plenty”.

Myth 1 – Property prices always go up  

Spruik – buy now or forever miss out

Reality – dwelling values always track real incomes over the long term

Truth – dwelling values have corrected at least seven times across Australia over the past 35 years and six times across south east Queensland.

Myth 2 – Rent is dead money

Spruik – renting is throwing away money, whereas interest paid to a bank is ‘investing’

Reality – buying to avoid paying ‘dead money’ only makes sense if you expect strong real price growth

Truth – renting makes economic sense, especially if you can secure a long term lease and invest the difference, between rent paid and mortgage costs, wisely.

For most of us, that is easier said than done.

Myth 3 – Rental costs always go up 

Spruik – renting is more expensive than buying

Reality – renting costs, unlike purchase prices – are determined by disposable incomes and the real need to live somewhere

Truth – rental growth is now falling; actual rents are likely to follow; it’s cheaper now to rent than buy (when you factor in all costs).

Rents reflect the real housing market – not the spruik or outside influences – and as a result, best reflect the market’s willingness to pay.

Myth 4 – There are many property markets

Spruik – if housing is too expensive in one place, it doesn’t mean it is expensive everywhere i.e. inner city property might be overpriced, but outer suburbs or small towns aren’t

Reality – buying a property in any location will not protect you from price falls

Truth – there are many property markets – each is somewhat different – but they are influenced by the same fundamentals and these are interlinked.

It always comes down to what you buy and how much you pay, regardless of where the property is and when you bought it.

Myth 5 – There is a shortage of new housing 

Spruik – there is not enough land because of geography, government, planning and infrastructure provision etc.

Reality – there is no physical shortage of new housing, only a surplus of speculative demand and cheap debt

Truth – new housing supply is cyclical – it fluctuates between periods of over and undersupply – just like most things in the property market.

We are supplying too much of the wrong stock.

Myth 6 – Everyone wants to live or invest here

Spruik – get in quick before a migrant buys; or on the flip side, you can always sell it to a rich overseas buyer

Reality – population growth is falling, is now well less than forecast and recent overseas buying restrictions are having an impact; plus there is growing social flack about ‘selling off the farm’

Truth – always ‘greener’ pastures; population growth follows job opportunities and overseas buyers are only interested in buying very specific properties.

Economic rent is increasingly focusing on a handful of areas; most of the country is missing out.

Myth 7 – Our level of household debt is in control

Spruik – with low and falling interest rates, smart investors are borrowing to their maximum capacity in order to leverage on future price growth

Reality – debt is consumption brought forward, regardless of how low interest rates fall and how long they stay low, loans have to be repaid

Truth – rising unemployment and underemployment, limited wage growth coupled with rising debt is not a good mix.

It’s really a house of cards, pun intended.

Myth 8 – Our banks are safe and lending standards high

Spruik – our biggest companies are banks (speaks volumes, really) and are therefore too big to fall, hence our lending standards are okay

Reality – APRA recently enforced tighter lending regulations, suggesting that our lending standards are not that great or safe from risks/future financial shocks

Truth – despite APRA changes, home loan lending continues to grow, with many lenders (whilst playing within the new rules) are including income from previous excluded sources in order to facilitate a new loan.

Safe as houses?