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.
suguna says
Hi Jon, I totally agrees with you. Cheers Suguna
Gary says
With a 4% growth rate and inflation at 3% you might as well not bother with the aggravation of having tenants.
P Swanson says
My parents bought a fibro house in Arncliffe 2205 in 1953 for 53 pound and lived there until passing on in 2011. I sold the house in 2012 for $610,000.00 so I definitely agree with your research.
I bought my first investment property at Junction Hill 2460 in 2000 for $96,500.00 and have recently renovated the kitchen and bathroom. It is now worth $300,000.00.
Thanks for the news letters and keep up the good work.
John says
Thanks Jon
very interesting. I’d be interested to know how these track versus % of average income as we all know banks will only lend if you can service the loan
Anth says
A possible small oversight.
Your 50year graph is an asymtote, based on fiat currency, which guess what?, historically has a life span of roughly 50yrs.
What say you?
FWIW: I’m no doomsdayer and am heavily invested.
Ian says
Looks like a game of move the Decimal point. -Interesting
Mike says
Having worked in property since 1974, with some formal qualifications and a lot of reading, I tend to agree with Jon despite the sometimes elegant and esoteric arguments as to why he has it all wrong. The reason is the age old supply and demand equation. We have been under building ever since the GFC. The risk averse Banks have instructed their valuers to look at doomsday valuations and News Limited appears to pursue an anti-property editorial policy. along with never ending focus on negative outlooks in spite of the long term trend firming in all directions. The second factor, Consumer Confidence is low (Gee, I wonder why?).
With only a small lift in Consumer Confidence and a “normalised” bank lending policy outlook, the herd mentality is very likely to take over, especially when pent up demand starts to kick in.
Leo says
Hi Jon, Thanks for your thoughts.
Hey Gary, are you investing? Gotta tell ya, I will take the difference of 4% growth minus 3% inflation = 1% of $300,000 (say, $3,000) if you don’t want it. Plus you can giimme the interest rate tax rebate (say, another $3,000) and the 2 1/2% depreciation on the property (say, $7,500) Whenever you don’t want that $13,500 please let me know. I’ll be keeping an eye out. So grateful, Leo.
tina says
So do I buy or not ???
mick says
Personally, I think Jon’s ideas are sound.
That said, we’re too focussed on paying down our (non-productive) debt on our own place to be in a position to invest ATM…Goal is to pay the 30 year mortgage off in 6 or so, so can’t complain really.
Terry says
Hi Jon, Thanks for the ongoing education through Knowledge Source.I have attended a few workshops that your company has organized recently and I have got to congratulate you and all your staff and of course all the speakers at the events e.g. Dymphna Boholt, Brett McFall.They spoke and shared that much information, I was amazed by how much there is still to learn.Congratulations you guys and please keep up the good work, collectively you are helping a lot of people that normally may not be helped at all.
Regards Terry
P.S.I am sorry to change the subject but I could not wait any longer to give credit where credit was due.
Nick says
Hi Jon
I’ve been listening to your positive spin on our financial state for about four years now and apart from the money you make by running other peoples adds what you keep forgetting is even though graphs can show similarities the real information lies in the reasons behind the trends as you can only make predictions from trend lines when the catalysts for the changes remain the same as i am currently managing the fourth richest mine in the world i can tell you that we are not going to avoid the repercussions from the financial catastrophes currently occurring in the rest of the world the mining industries are setting themselves up to ride out the storm so i would suggest you and your readers do the same as export makes up ninety percent of our income our major trading partners as of yet have not reached rock bottom america will have to invent another numerical figure very soon of which they are extremely good at as for China i have personally spent to much time trying to change their self destructive industrial methodology they are indeed an aircraft without wings as for the Europeans they were the first to actually start selling whole towns to private enterprise gee i wonder why that didn’t work so all in all we have about another twelve months before the sandbags let in the water currently drowning the rest of the financial world
Regards Just another miner
Rod says
Gee Nick,
With English like that, I can`t believe you could even run a tuck shop. Ever heard of a full stop?
dean says
Rod..dont shoot the messenger. Nick has some pertinent points. Attacking the person and not their position is kindve well…childish i suppose. Certainly, its not constructive in any way, and does not contribute to the debate regarding the issues confronting investors and home buyers.
Nick points out, quite well i think, that Australias economics are 90% demand driven and resource based; and our reliance upon the presently crumbling overseas markets.. (he cites china, europe, and america) will soon have repercussions far beyond what we are presently experiencing..as in, the present flat market is not going to bloom..but perhaps is doomed?..(that was my bad rhythmic stuff Rod..do with it what you must)
I tend to agree.with Nick.
Not only is our export market shot, depressed and shrinking for the foreseeable future, but consumer confidence here…from investors to FH buyers is diminished and shaken..wary at best…banks are less flexible nowadays, job security is reduced, required deposits are huge…any and many ways you turn there is a sense of insecurity out there in the general populace…we all know that they cant print money adfinitum, and the present “calm” is an illusion….
Personally, (but i am a conservative investor), i believe liquidity..cash…is a good hold…although after tax on the dodgy interest rates the thieving banks pay the money barely matchs cost of living increases, soon enough there will be plenty of bargains to be had as the soon to be over extended have to rationalise their failing portfolios in a dead market…
Andrew says
The Aust population is still growing strongly,( births + immigration both legal and illegal) and all these people need homes to live in, so that is always a floor to the house prices.
The long term trend is more important than the current ups and downs. Land prices in England have gone up 10% a year on AVERAGE over the last 900 years. This lends support to Jons basic statement of rising land prices over the decades/centuries regardless of economic crashes along the way. The difficulty is not in knowing the long term trend BUT rather in avoiding being destroyed financially in the crashes /depressions /recessions along the way.
Price inflation- (cost of living) of course is always close to the land price increase over the long term. ie incomes go up 20% them land/house prices can also go up 20% as most people still want a home to live in and all can pay more to buy or rent a house.
As a farmer, I know that food prices (grain /meat ), fibre (wool, cotton) and minerals have all been falling in REAL price terms for over 200 years due to production efficiencies- increased productivity. Every year my family must grow more food at a lower average cost or we will go broke- as many of my neighbours have This is why we have such a high living standard compared to most other countries and compared to past centuries.
I have an Uncle who has been forecasting economic disaster every day since about 1975. As a result he has decided to do nothing and has just got poorer, The bible talks of wars and rumours of war, there is nothing new under the sun.
Derek says
I think Andrew has nailed it in his last paragraph. No matter what the outlook there are ways to make money. How many fortunes were made during financial crashes over history? There are always doomsdayers. If we pay too much attention to them, we will only get poorer. A Miner that sees his own industry suffering assumes it will cause suffering everywhere else. The truth is that while mining has been enriching this nation, Manufacturing has been in recession. With a mining-inflated high dollar, it just costs too much to invest in manufacturing here. Now with the dollar dropping, maybe the rest of the country can recover. (Theory) Mining may have prevented Australia from having the ‘recession it had to have’. A reduction in mining revenue will return us to normality not disaster.