50 years of history is telling us to look for 13% a year!
You’re property will be worth a million dollars. I promise.
Ok, I’m being cute. Of course the real question is when. 5 years? 10 years? 30 years?
It depends how quickly prices grow. And that really is the million dollar question that everyone wants to know the answer to.
I wanted to know the answer too. I’m a curious guy. So I did a bit more digging around in the data. My wife’s not happy. Do you know how hard ones and zero’s are to get out of your jeans?
But I wanted to get a long-run perspective, so I had to get a little creative. Splice a few series together. Mess around with a few data sources… I won’t bore you with the details.
But here’s what I found. And I think you’ll find the results very surprising.
To start with I put together a series of Sydney and Melbourne house prices back to 1960. This is just a straight average of the two, so Sydney is probably underweight, and Melbourne is overweight in the series, but since I’m interested in the growth rates, I think this will just come out in the wash.
Unlike those data stains! Hey? Anybody?
Is this mic on?
Anyway, this is what the time series chart looks like:
This should look pretty familiar to us.
There’s the peak and come-off in the late 80s. The steady ramp up through the 90s. The wild ride that property gave us between 2000 and today.
All well and good.
But what I really wanted to try and get down to was trend growth rates. To do that I converted the chart into a log scale. Log scales are useful if you’re dealing with data that generally grows in fairly consistent increments in percentage terms but larger and larger increments in absolute terms. Property prices are just like this.
And that’s what this chart shows:
What we can see here is that the growth rate has it’s ups and downs. Sometimes a little faster. Sometimes a little slower. But overall, across the long run back to 1960, property seems to hold a pretty consistent rate of growth.
And that trend run seems to be around the 8 percent a year mark. Which explains why property’s been such an excellent investment over the long term.
This chart here puts that trend line over the time series:
This shows us what we already know – that over the last 5 yeas or so, the property market has been growing below trend.
Now let’s imagine the simple scenario, where property price growth just returns to trend. (This is my personal baseline scenario, with lots of room on the upside.)
That would see median house prices reach the magic million dollar mark sometime in 2016.
Surprised? It was quicker than I thought it’d be. But this isn’t even a particularly optimistic scenario. This just sees prices return to their long run trend – the trend that’s been in effect for 50 years!
So it could actually be sooner!
But just for interests’ sake, let’s also imagine that the doomsayers are right, and the long run dynamics of the property market that have been in effect for the last 50 years, are broken.
Let’s imagine that tougher times that have been in effect, more or less since 2004, are now the norm. That is, rather than growing at 8 percent a year, prices will only grow at around 4 percent a year from here on.
This chart here tells the story.
The first point is just how flat the green line is now. It’s really saying that the future is going to be radically different from the past 50 years.
The second point is that even under that scenario, we’re still hitting the million dollar mark sometime in 2024. So you’d have to leave that champagne on the shelf for an extra 8 years.
It’s not so bad. Patience can be a virtue. But it’s also extreme. I’d actually argue that the 2024 mark is close to a worse case scenario. I’d argue that a conservative, defensive position is somewhere between the two – 2016 and 2024.
And my own position, based on what I see going on around me, is that we could actually see things bounce back much quicker than every scenario painted here.
I mean, to see prices hit a million dollars by 2016, we only need to see growth of around 13 percent a year over the next three years.
It’s well within reason, especially given the soft patch we’ve just come through. There’s a lot of catching up to do.
But the question investors need to ask themselves is do they believe the fear-mongers?
Or do they back themselves and 50 years of history?
No prizes for guessing where I come down on that one.