Three sure ways to bring house prices down: Craig Turnbull

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I just can’t understand why there is so much white noise around property investors and negative gearing.

Much of the negative press and commentary has been coming from the “green eyed monster” approach, where the “evil rich investors” who are utilizing legal methods to lower their level of personal taxation and grow their wealth, are blamed for the high pricing of Australian real estate.

It’s just rubbish.

And it’s disappointing to see people trying to get ahead in life by property investing are being vilified. The same taxation rules apply to share investors and business owners. So why is property singled out?

I guess it is because of the high growth in prices in recent years in some cities of Australia, that make it very noticeable that affordability has become a major issue for much of the populace. To blame investors though is just wrong. The negative gearing tax laws have been around for decades – no one bothered to point fingers until now.

So let’s just play the game and assume that indeed prices are too high. And that pundits, commentators and politicians who have a left of centre thought process are right – that the “evil negative gearers” are to blame and they should be stomped on so that the price of houses will fall and everyone can buy one and all will be well. And let’s also assume that Labor wins the coming election and implements their negative gearing policy changes, or in fact the Liberals win and they make changes, even though they said they wouldn’t.

Would prices come down?

My short answer is – I don’t know for sure. Though my instinct is that this kind of market circumstance and policy manipulation will have effects – perhaps in the short-ish term, say over the next 2-3 years, then yes, there could be price drops due to weaker demand, though I’m not exactly sure how to quantify it – perhaps 5-10% (?), which is what usually happens at the end of a booming price growth period.

I am reasonably sure that rents will inevitably go up as there will be less rental properties available to rent, with investors exiting the market. That may take 1-2 years to flow through, but simply put, less supply and likely a growing demand for rental accommodation. Even if prices do come down, it doesn’t necessarily follow that people will be able to buy, or even that they will want to do so. Many will still choose to rent.

Prices coming down dramatically and quickly would also have very negative effects on average household wealth and our national economy would suffer due to losses in the financial system. People with a small percentage of equity in their homes might be forced to sell by the banks who are worried about their security. And that would be the beginning of a downward economic spiral.

But what if we had to get housing prices down, right now? What are three things we could do?

As a part of my ongoing research in to housing affordability, investing and the national and global economy, I read articles every day. This one, about the San Francisco housing market caught my attention - you can read it if you wish by clicking the link. The author did a study of rental & capital prices over 30 years and concluded that these three things could dramatically lower housing prices in a city which figures with some of the most stratospheric real estate prices in the world. Since 2012, the median price of a San Francisco home has increased from $670,000 to $1.12 million, according to Zillow.com.

The author tracked San Francisco prices over the last 60 years and concluded that there has been a 6.6% average growth per year, which means prices have more than quadrupled. His data showed that there are three main factors affecting that price growth.

1. The number of jobs in San Francisco county;
2. The number of places in San Francisco county for people to live;
3. The total amount of money paid to everyone who works in San Francisco county.

Remember, this is the edge of Silicon Valley, where over the last 30 years, millions and billions of dollars have been made and incredibly high salaries paid by the likes of Microsoft and Google.

These three factors, when you look at it are just common sense. If there are lots of high paying jobs available, people will migrate to those locations and have more money to buy property when they get there. And if there aren’t enough homes to house all those people, prices will rise. Look what happened in the mining boom for Western Australia.

The author concludes that to reduce house prices by 66%, to equate to those prices in nearby Portland (just over the San Francisco Bay) an across the board salary cut of 50% or have 50% job losses or add 50% to the supply of available housing, would be required.

Therefore, to lower housing prices in Australia, to what they were about 20 years ago, one of the following three things needs to occur:-

1. Accept a 50% pay cut for everyone.
2. Have half of us out of work.
3. Build an extra 4.5M housing dwellings overnight.

There you go, high real estate home prices solved. And no need to change any tax policies.

Easy really.

OK, maybe not, but this is what is would take. Let’s trust that such draconian Armageddon like economic circumstances never arrive.

Personally, I don’t want to see anyone take a pay cut, or be out of work if they want to work. And our nation physically can’t build too many more homes that we are doing now, which is something around 200,000 or so every year.

Nor do I want to see home prices drop dramatically – it would affect too many people in a very negative way. Far more than those who might benefit.

But you know what I would like to see? A decade of much more moderate house price growth – let’s say around 2-3 % per annum. That could keep everyone happy and give those who want to buy a chance to catch up on savings and get ahead of the curve.

Though you know as well as I, it is an unlikely scenario.

Real estate grows in fits and starts, and when it booms, it goes up fast, before finally easing downwards at the end of each and every cycle, before flattening out for a number of years.

Everything going on now – less finance available for local investors and developers, no finance for overseas buyers, increases in stamp duty & land taxes, higher prices – all of these things are rapidly slowing the market across the country – even in markets that are already slow.

So for those sitting on the sidelines waiting to buy, I think your chance may come.

And in the meantime?

Craig Turnbull is an author, property developer and real estate investor. He can be contacted here.