As far as I’m concerned house prices always rise. You’ve got to take a pretty selective view of history to argue otherwise.
I’m going to set myself up like one of those guys at the school fete were you throw a ball at a target and if it hits, it drops him in the water. Here goes:
“House prices always rise. Always.”
I can hear the property poo-poo’ers howling already.
Ok, I know this is a contentious point, so let me throw in a qualifier, that I don’t think weakens it too much.
“House prices always rise, over any time period of time that matters. Always.
I’m not blind to the cycles in the housing market. I know that if you bought a house today, there’s every chance you might not get what you paid for it if you tried to sell it in a couple of months.
And I know there are longer periods where prices stagnate – like the 5 years that followed the GFC. If you bought at the top there, there were quite a few years were that statement wasn’t true.
(Though if you bought well, like I did, you could have still made money. But we’re just talking generally here…)
But if these are the kind of periods that matter to you, then you and I have a pretty different approach to property investing.
I know some people have made a go of ‘flipping’ properties, sometimes selling the property before they’ve even taken possession of it.
This doesn’t interest me much. It just seems like a whole lot of work, and you’re totally relying on short-term movements in the market. It’s a bit of a gamble and I just don’t like taking chances with my money.
It’s the same story if your hold is less than 5 years. You can make money off the cycle, but it’s not a strategy for building a first class portfolio. When I find a property that performs, I’m never keen to let it go.
So if you’re a short-run investor, then yes, I’ll admit, the cycle can move against you, prices can fall, and your property can lose value.
But on any time scale that matters, and I guess I’m talking 7+ years, it is true that prices always go up.
The RBA has been looking into, and recently produced this chart here, which tracks house prices back to 1950:
Now this isn’t a garden variety price chart, so let me step you through it. First up, this is ‘real’ house prices, in 2014 dollars. So it strips out inflation.
When it says that the median house price was about $90,000 in 1950, that wasn’t what the market rate was back then. It was a lot less. But in 2014 dollars, given what money buys you today, that’s what houses were worth.
The second curly feature of this graph is that it’s in a log-scale. House prices have grown ‘exponentially’ over the last 70 years. If you were to chart it, you’d get your classic ‘hockey stick’ shape – like you get for the economy, population, technology, things like that.
The log scale gives you a clearer sense of the underlying trends.
And when you chart it like that, it’s clear that the trend is up. Always. Always and ever upwards.
There have really only be two short periods where prices stagnated – the mid-70s to the mid-80s, and again in the mid-90s. But the important thing to remember is that around this time, inflation was a lot higher than it is now – mostly up above 10% (compared with 2.5% today.)
And it’s the inflation numbers that make the prices look less awesome. House prices were probably growing nominally about 7 or 8 % through these periods. They were still growing, they just were keeping up with inflation, which racing ahead.
So stagnant real prices was more of an inflation story than a house price story.
(And you could argue that inflation was eating up your mortgage, so you probably came out ahead anyway…)
The other interesting thing to remember is that with high inflation comes high interest rates. Interest rates were a stack lot higher than they are now. The average interest rate in the 70s and 80s was 12%. The lowest was 8.4%. At its worst, interest rates were 17%!
You can fix rates for 5 years at less than 5% right now!
So those folk arguing that you should expect prices to fall in the short-term are really arguing against history. It normally takes interest rates in at least double figures to knock the wind out of prices.
For my money, the lowest interest rates in 50 years just don’t seem like they’ll cut it.
So yeah, sure. You could cherry-pick some short periods in history where prices have flat lined, but you’ve got to take a pretty selective (i.e blinkered) view of history.
Say you bought at the peak in Sydney in 2003 and sold three years later. Sure, if you did that, you lost money.
But if you bought at that peak and held, then you’re up more than 50% in capital gains right now – more if you bought with yields in mind as well.
So there. I said it. As far as I’m concerned, and for the kind of investor I am, prices always go up.
Simple as that.
What do you reckon? Do you think prices will keep trending upwards?
Reckon we might be on the brink of a stagnant period? Or falls?
What’s the biggest factor influencing prices right now? Interest rates?