As house prices in Sydney and Melbourne rise and home ownership gets further out of reach for many, suggestions surrounding the cause of the problem abound.

While many of the ideas and arguments being put forward no doubt have merit, however, a growing number of commentators feel that not all of these in fact stand up to scrutiny. In an article published in Fairfax Newspapers last year, for example, University of Sydney researchers Professor Peter Phibbs and Professor Nicole Gurran argued that fallacies were being advanced in a number of areas.

Speaking about the Sydney market in particular, Phibbs and Gurran argued that:

• Ideas about foreigners bidding up the cost of housing are erroneous, as strict rules which limit the circumstances in which non-residents can purchase established housing as opposed to new dwellings mean that the majority of foreign purchasing activity actually added to new construction rather than eating into the supply of existing housing stock.
• Ideas put forward by property industry lobbyists about the planning system being the main constraint to unlocking new housing supply are also somewhat misleading as reforms (at least in Sydney’s case) over the past decade had allowed the system to respond to the current housing boom with greater flexibility.
• The notion that housing was a state and local government issue only was wrong as federal government tax settings such as negative gearing and capital gains tax discounts been a factor in underpinning a situation in which the cyclical height of property market booms had been driven upward, putting more pressure on affordability.
• Ideas about local governments being the main problem in terms of creating new supply were erroneous as planning reforms over the past decade had restricted the ability of councils to obstruct new development and many local governments at any rate were supportive of growth and worked hard to encourage new development within their jurisdiction.
• The notion that affordability issues would be solved by constructing new supply was also a fallacy.

With regard to the last point, Phibbs and Gurran acknowledge the importance of supply in addressing affordability but suggest that typically, run-ups in new supply occur only in response to large, cyclical upturns in demand. Such responses are not usually sufficient to eat into any existing levels of undersupply to a substantial extent over the longer term, they suggest.

Moreover, supply responses driven by upswings within the property cycle may not deliver the type of affordable housing which families on low to middle incomes require. Instead, Phibbs argues, issues regarding affordability are more effectively addressed through more direct and focused interventions such as requiring minimum portions of new developments to be set aside for affordable housing.

Other commentators agree that there are areas of misconception surrounding the current debate.

One such area revolves around foreigners and the narrative that buyers from overseas are snapping up established homes and driving up house prices  – with some allegedly flouting rules which are designed to prevent non-residents from purchasing established dwellings (as opposed to new dwellings) unless they intend to use the dwelling as a place of residence.

Such a notion does not stand up to scrutiny, former ANZ chief economist Saul Eslake says. Even if you are generous to the argument about rorting and therefore assume that the $7.17 billion figure reported by the Foreign Investment Review Board as representing the overall value of established property purchased by non-residents during the 2013/14 financial year (the most recent for which data is available) is therefore understated by half, foreigners would still have purchased only around $15 billion worth of established residential property in that year.

Against that, he says domestic purchasers took out more than $100 billion ($118.4 billion) worth of loans for the purpose of buying established housing as a form of investment property during that same period and more than $100 billion ($108.5 billion) in loans to buy established housing for owner occupation purposes. Add to that probably $50 billion which domestic buyers tipped in of their own equity and you have a situation in which the scale of foreign buyer activity relative to that of domestic buyers is sufficiently small to render the overall effect of foreign purchasers upon the market for established dwellings almost irrelevant.

Moreover, Eslake adds, foreign buying activity with regard to new dwellings (which represents around two-thirds of foreign purchaser activity in residential real-estate) indeed adds to new supply.

“The suggestion that foreigners in any significant way are responsible for pushing up prices – except at the very top end – is, I think, ludicrous,” he said.

Housing Industry Association senior economist Shane Garrett agrees, adding that any newly constructed homes purchased by foreign investors which are subsequently rented out add critical supply to the rental market.

“Anything which leads to more homes being built results in the supply of housing being increased,” he said. “The vast majority of the investor owned homes (foreign or domestic owned) are made available to the rental market, which in places like Sydney and Melbourne is pretty tight.

“If foreign investment participation wasn’t as high as it is now, rental market bottlenecks in these cities would be even more pronounced. That would mean higher costs for accommodation, longer waiting lists and higher rental prices. Considering that it is usually vulnerable families who are the most likely to rent, any reduction in the availability of rental stock would be quite detrimental.”

Apart from foreign buyers, Eslake says perhaps a more important area of fallacy revolves around negative gearing and ideas that (a) activity on the part of domestic investors is adding to supply; and (b) abolishing negative gearing would lead to a reduction in the available supply of properties for rent and an increase in rental prices.

With regard to the idea about domestic investment adding to supply, he says up until the first half of last year, around 93 per cent of all loans made to domestic property investors recently were going into established dwellings rather than construction of new housing. Accordingly, unlike the case with foreign buyers, domestic investors were in large part crowding out potential home-buyers as opposed to generating new housing supply.

As for the idea that abolishing negative gearing would jack up rent, Eslake says this is not borne out in evidence. While rents did indeed rise in Sydney and Perth (but not elsewhere) when the Hawke government temporarily abolished negative gearing in the mid-1980s, this was primarily a result of extremely tight rental market conditions in those cities prior to the policy shift and was not bought on by the change itself, he says. Overseas, there was no collapse in rental vacancy rates in the US when they abolished negative gearing in 1986 nor when the UK did so more recently, he adds.

Moreover, given that domestic landlords primarily operate in the established housing market as opposed to the market for new construction, Eslake says any pull-back in activity on their behalf as a result of negative gearing no longer being allowed would indeed reduce the supply of rental housing but would increase the volume of stock available for the owner occupier segment of the market and therefore reduce the number of people who needed to rent as opposed to buying their own home.

A third area of fallacy, Eslake says, revolves around the idea that government home owner incentive schemes are helping to improve home ownership or housing affordability. Instead, he says, these – along with the 50 per cent discount on capital gains tax and the ability of investors to negatively gear their properties – have merely added to demand and pushed up prices.

Garrett, meanwhile, says the actual situation with regard to affordability may not be as extreme as is sometimes portrayed in the media. Aside from Sydney and Melbourne, current house price to earnings ratios were below decade averages in other cities, he said – meaning that affordability pressures were predominately concentrated around the two big cities as opposed to being more widespread. Moreover, on measures of income to mortgage payments, most cities were more affordable now compared with both decade averages and 20-year averages – albeit with this in part being driven by current interest rates being abnormally low.

As for what should be done to improve affordability, Eslake would like to see the federal government ceasing to prop up demand through things like home owner incentives, the capital gains tax discount and the continued allowance of negative gearing. On the supply side, he would like to see planning restrictions on both brownfield and greenfield developments eased as well as more public investment in affordable housing. This investment would ideally come through community housing organisations which are well placed from a social perspective to work effectively with the type of clientele who are typically in need of housing assistance.

Eslake would also like to see greater levels of investment in transport infrastructure in the outer suburbs. Without this, he says, the ability of outer suburbs to provide realistic and suitable options for affordable living is limited as a result of the time and cost associated with commuting to and from these locations to areas where the best employment opportunities lie in and around city centres.

Phibbs, meanwhile, would like to see requirements for a proportion of dwellings associated with new developments to be set aside for affordable housing, whilst Garrett would like to see planning restrictions eased as well as a reduction in the taxation burden associated with new housing provision.

All up, Phibbs says the current state of the debate is disappointing, and is being largely impacted by vested interests. While it was understandable that industry associations and others would argue according to the best interests of those whom they represent, he says journalists and others should not merely accept what is being said without critical analysis.

“Everyone is basically pushing their own barrow,” Phibbs said. “I find the level of discussion pretty low.”