Mythbusting the residential property market

These myths can influence decisions about buying, selling, or investing in property - sometimes leading people to miss opportunities or make choices based on incorrect assumptions. This week we examine some common property market myths and uncover the reality behind them.

Market timing in property is risky, as we've seen experts with extensive data get predictions wrong. When you add high transaction costs like stamp duty, legal fees, and moving expenses, trying to time purchases can be costly.

The best time to buy, sell, or invest in property is simply when you're ready - with enough savings, stable income, and clear housing needs. Making property decisions based on your situation rather than market predictions usually works out better.

While it's commonly claimed that house prices double every 10 years, the reality is more complex and heavily dependent on location and timing. Different cities and regions can experience vastly different growth rates, with some areas seeing prices more than double while others might see modest growth or even decline. Local economic conditions, infrastructure development, and population trends all play crucial roles in determining property price movements.

Property price growth tends to move in cycles rather than following a steady upward trajectory. Markets typically experience periods of strong growth followed by stabilisation or occasional declines. Rather than relying on a "doubling every decade" rule of thumb, buyers should focus on their own circumstances and ability to hold property long-term to weather these market fluctuations.

Housing markets have proven remarkably stable, even during major economic shocks. The 2007-09 financial crisis and COVID-19 pandemic only saw brief price drops of around six per cent before recovering. In Australia, strong population growth and limited new housing supply, especially in cities, continue to support prices.

While housing affordability is a real concern, several factors prevent major price drops: strict building regulations limit new housing, population growth drives ongoing demand, and job concentration in cities keeps urban housing in high demand. Instead of a sharp correction, history suggests we're more likely to see periods where prices level out before growing again.

Rental prices are primarily driven by market supply and demand, not individual landlord decisions. When there are plenty of rental options available, tenants can simply choose cheaper properties, forcing landlords to keep rents competitive or risk having empty properties and no income. Landlords generally can't raise rents above market rates because tenants will move to more affordable options.

What actually drives rent increases is the balance of rental properties versus people looking to rent. When there's strong demand (due to factors like population growth, more international students, or people unable to buy) but limited rental supply, competition among tenants pushes rents up. Recent rent rises have more to do with housing shortages and increased demand than individual landlord decisions. This is why we often see rents stay flat or even fall in areas with lots of new apartments or declining populations.

While negative gearing makes property investment more attractive by offering tax benefits, it's too simplistic to blame it alone for high house prices. Many countries without negative gearing also face significant housing affordability challenges. The main drivers of Australian house prices include limited housing supply in desirable areas, strong population growth, strict planning regulations, and the concentration of jobs in major cities.

Property investment decisions involve many factors beyond tax benefits - location, expected capital growth, rental yield, interest rates, and maintenance costs all play important roles. Negative gearing is just one piece of a complex puzzle that includes broader economic factors like household income levels, lending policies, and construction costs. Looking at housing affordability through the single lens of negative gearing misses these other crucial market forces.

When you buy a home to live in rather than for investment, leverage is particularly powerful because you're getting two benefits - a place to live and an investment. With $100,000 saved, you could buy a $500,000 home with an 80 per cent loan. If the property goes up 10 per cent to $550,000, you've made $50,000 on your $100,000 - a 50 per cent return. Meanwhile, you've had a place to live with fixed mortgage payments instead of rising rents.

In contrast, if you rent and invest your $100,000 in shares or bitcoin, most people wouldn't borrow an extra $400,000 for these investments due to higher interest rates and market volatility. This means that same 10 per cent rise would only give you $10,000 on your $100,000 - and you'd still be paying rent. The ability to safely use leverage while getting both housing and investment benefits makes buying a home to live in uniquely attractive.