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?
Lois says
You have to ask ‘why’ are the banks prepared to lend so low… They aren’t offering low interest rates to make new friends.. I don’t believe we are going to see an upsurge any time soon.
Andrew M says
Banks are generally able to pass on the RBA cash rate plus their ‘haircut’ (typically 2.5% extra). So nothing to do with how generous banks are, more about what cash rate RBA sets. Banks obviously want to lend as much as is possible within safe limits, more loans = more profit. I also believe that a contributor to the record profits banks are seeing nowadays has a lot to do with the fact that houses/mortgage prices have risen so much. The higher value they get to loan out then their interest earning grows exponentially. And that’s probably a contributor to why banks can offer ‘low’ rates and low or no fees on their products. Because they are making an absolute killing in interest, they are not really bothered by a small drop in earnings.
Ken. says
Andrew, read my, and Eileen’s blog again. I think the RBA’s interest to the banks, and the bank’s variable interest to home loan borrowers, and the lock in rates, are different things. They can still con you, or try to con you into locking your loan in at a seemingly low interest rate when I believe the banks know the interest rates will go even lower. And presto, they make even more dough. Nothing to do with the original RBA’s interest rate. Well that’s my opinion from experience any way. I always try to learn from other people’s mistakes. Cheers.
Tom says
Fractional reserve banking enables institutions to write numerous loans, all secured against the one ‘Reserve’ held in their accounts. Hypothetically, six loans, each at say 5%, would return 30%, while they may be paying something like 2% for their ‘Reserve’. That is one of the reasons why ‘Debt’ is not wealth or an asset!!!
Sonex386 says
Something has to give eventually. The percentage of income required to service peoples housing loans is getting higher and higher. I don’t think our wages are going up at the same rate as house values have increased. Therefore loan bigger loans and repayments. Maybe the baby boomer mums and dads are handing over some big lumps of cash so the kids can get a place where they want to live. There is a lot of talk about the Chinese investor forcing up the market too. Wait until interests go up again. There will be fire sales galore. A lot of the people in the market now are up to their eyeballs in debt already. They think interest rates will always be 6%. Sorry about the rant. 🙂
Ken. says
Sorry Tom, I’m not a banker, but I just enjoy making money out of the simple and practical ways of life. To be honest I’d like you to simplify that to the point of myself making any money out of it. There is good debt and bad debt though, eh? Cheers
Ken. says
Lois, you are spot on. The big banks know well in advance what is going on. Don’t lock in yet. Interest rates will fall more yet. I know a lot of people who got conned by banks to split their home loans, and interest rates dropped for about two years. So called educated people will argue their so called wisdom, but I prefer to called what we know it as, common sense.
Eileen says
Lois and Ken, I agree…………I would never lock in fixed interest rates with the banks. They know which way the rates are heading so why would I think I knew better than they? The banks don’t want any more friends, so they do us no favours.
Shane, why do you think the prices have dropped in Gladstone?
Kathy, I guess we no longer have a properly functioning economy. I disagree that debt is not wealth. There’s good debt and bad debt. It depends why you are borrowing the money (ie investment).
Tom says
Eileen, it is wonderful to find someone who respects the English language!!!
Most would have written, ” – – better than ‘them’?”. Good grammar is a rarity since schools stopped teaching English as a language. Philippinas know more about grammatical English than most native Aussies do!!! They learn English as a language. I know I was extremely fortunate to have studied Latin at school. Cicero taught me a lot more about English than my so-called ‘English’ lessons ever even tried to do.
Shane says
I settled on a unit in Gladstone in January 2013 at 300K and there is an identicle unit 2 doors up in same complex that has been on the market at 190K for over six months unsold, considerable fall in value and still declining over the last 20 months.
Steven Hambly says
Gladstone property market has been hammered. I have a house at New Auckland which I thought I got cheap, but the market dropped even more.
Anlu says
That’s certainly far from great Shane but to be fair, Jon has clarified multiple times in the article he’s referring to relatively long term investment gains, not over a period of 3 yrs or so. Good luck with your property though!
Kathy says
Sorry, but I have to respectfully disagree. In a properly functioning economy (one with no central bank manipulation, for example), price inflation AND deflation are the norm.
Constant price inflation is a feature that has only occurred since the start of last century, from about the early 1900’s onward, which not coincidentally is also the time when central banks were universally formed and started to manipulate currency markets.
Once again in a properly functioning economy, house prices, like all asset prices, should only increase (or decrease) in line with inflation.
I have a chart of Australian house prices, adjusted for inflation, from 1880 until 2010, which shows house prices basically stayed flat and constant until the 1970’s (it is copyrighted, otherwise I could show it). This was because credit started to become much more widely available, due to the abolishment of the gold standard and is also shortly after the introduction of a new currency in Australia.
If people are not living beyond their means by borrowing to the absolute capacity, the economy is not growing. It’s why central banks around the world are dropping interest rates to record lows, in some cases to negative, in a desperate attempt to get people and companies to continue borrowing. Banks “create” new money every time they write a new loan.
If our economies were so healthy and doing so well, it would not be necessary to have interest rates at these so called “emergency” levels. Because our economies are not really recovering (due to the actions of our central banks and politicians), it is likely interest rates will remain at these low levels for some time.
Hopefully people have wised up and realised that debt is not wealth. Debt is debt and is a liability that needs to be repaid at some stage. It is a claim on future income for today’s consumption, and there are no guarantees on that future income.
Jon Giaan says
I think I agree with most of what you say here, but if a ‘normally’ functioning economy hasn’t existed for over a hundred years (at least!), is it a really a useful benchmark? Sure, there’s odd-ball stuff going on. But there always is. Before the feds, there were kings and queens with their fingers in the pie. But the point I think is that through all the tinkering through all the ages, property performs well. Maybe it won’t if the system collapses in on itself (could be a possibility), but if the system collapses, I’m pretty sure I want my wealth banked in an asset class that actually exists.
Thinking says
So it took 37 years for the price to double from 1950 ($90K) to around 1987 ($180K) before heading north and then another 13 years to around 2000 ($360K) to double again. We have seen a real increase of around $80,000 since then. So looks like the late 80’s & 90’s were the winner. Do you think we will see that ever again?
Sef says
Tell me one question first then I go further. If the property market is so hot, why the property investors are promoting this with free seminars and even thronging money to get the people in. My thoughts are these people are trying to save their own investment because if it went down most of them will be out of the business. They are taking advantage of retired honest people and targeting them to get into market at very high end.
Take an example someone bought an house around 500k in Brisbane 5 years ago. the average interest per year is 25k. After letting it and paying rates and fees he still need to pay 15k out of the pocket every year. This is 75k plus accumulated interest over the period. Now if he can sell it for even 600k at the moment it will not give him a cent other then mental an physical stress.
So at the moment the price is very high look at the data we are the fourth world most expensive market. Also 90% of our population household income is less then 100K. can they afford to buy a house worth 450k ? I don’t think so.
I suspect the property market will go down eventually in next two years. The unemployment is going high. The bank will get down their interest rate close to 1% to try to keep the people in the market. But eventually there will be foreclosure and it will be affordable.
Tom says
People have to live somewhere, be they owners or renters – and owning any home requires investment capital.
Unless all the Baby Boomers fall off the perch simultaneously, demand will always outstrip supply. There MAY be a temporary BLIP in the graph; and ‘a nice apartment’ may well replace the ‘quarter acre block’ dream. However, while there are ever more SMSFs holding ever more rental properties, investors will gradually replace home-owners in the market – they will be the only ones capable of borrowing & buying. Unless we have a drop in population, which is unlikely, the upward trend, which Jon describes, will continue its rise, pricing working people out of home ownership and into renting from investors. Remember, people like Dymphna Boholt, who know what they are talking about, say that one needs at least six properties in one’s portfolio for a decent retirement nest egg. At that rate, less than 14% of Australians can expect to have such a retirement.
The failure of commercial Superannuation funds to provide a consistent, reliable income, for retirees, more people are realising the truth of what Jon says about having assets of real innate value. People like Dymphna are showing us how to be intelligent in choosing investment portfolios. Thank you Knowledge Source.