Property Doubles every 10 years

[Nicholas H]

I have been told a bit like a catch phrase that Property prices will double every 10 years. People I have talked to about this are just going that property prices have done this for the last couple of decades, so they assume that it will continue to do this. It would be great if it kept doing this, but I do not see how. One of the main influences on buy and hold that I can see is inflation, although it basically never seems to be mentioned. I heard one person say this boom is better then the last property boom cause there is no inflation going wild. The low inflation might not make the interest rates rise like they did before .. but with them being so long I can not see prices will go high.

If you said that inflation was 2.5% which compared to the rest of the world is high, but about what we have in Australia. Now property keeps increasing on average at twice the inflation rate (highly unlikely) and we now had on average a growth rate of 5%. If this value is compounded then it will still take about 15 years to double in price. If prices settle down and increase at 3% or even below inflation then it could take easily 20 or 30 years for prices to increase. With inflation being over 10% I can see property as a great asset to buy and hold. But just to buy and hold now, everything tells me it is a mugs game. I can understand running as a business in that you find where you can get a deduction, or renovate and make your profit then and there. But waiting for capital gain to appear just does not seem like it is going to happen. I am more then happy for some one to find flaws in my arguments cause I would like to buy more property. But buying for the expected capital gains I can not see how it is going to happen.

This might be wrong, but I remember someone saying that inflation really was not really around much before World War II. Maybe we are heading for a low inflation period where I see a great time for business and income streams, but not that good a time for capital gains.

 

[MarkB]

You've made a point that land values, on average, increase at twice the rate of inflation.

The value of property (ie. land) is not solely dependent upon inflation.

The supply of land is essentially fixed.

However the supply of persons who demand land increases (ie. the population grows).

Also, other factors such as Average Weekly Earnings (AWE) and wealth play an important role.

The way I see it you have a fixed supply of land, being demanded by more people who are earning more and have greater wealth > rising land values.

While it is true that not all land is equal and that some land is more desired than others, it seems pretty clear to me that in "desirable" areas it wouldn't take much for land values to continue to increase at twice the rate of inflation - for at least the foreseeable future.

I also think it is problematic to compare this current market with those of the past - and particularly pre WW2. My reasons for this are:

1. People are much more mobile now. They travel - they see other places that their parents and grandparents might never have had the opportunity to and think "this looks nice, think I'll buy a house here".

2. Age expectancy has increased. More people are looking for that perfect spot to spend their twilight years. And just because they spent the first 65 years of their life in one town or city, doesn't mean they will spent their last years there as well.

3. Australia is a much more urbanised society now than it was pre-WW2. The move away from the bush puts negative pressure on prices in some rural areas, whilst augmenting capital city demand.

MB

 

[Peter_Tersteeg]

There was plenty of inflation in before WWII in the depression.

I also tend to agree that property doubling every 10 years in a period of low inflation is unsastainable without creating a significant wealth gap. Keep in mind that this has only been a trend in major urban centres and not Australia wide. I'd be interested to know the long term growth trends in the satelite cities to the capitals.

Ultimatly property is driven by supply and demand. If demand drops off because property is no longer affordable, then prices will not continue to rise. Interest rates can be a contributing factor to this, as interest rates are also a contributing factor to low inflation.

 

[Jacque]

Nicholas,
I can appreciate what you're saying about inflation, but what you're forgetting is that property is very cyclical and not usually consistent when it comes to growth rates. One suburb, for example, may have slow or stagnant growth for five yrs (perhaps only just or not even keeping pace with inflation) and then have a two-three yr burst of boom growth of up to 30-40% p/a (as has just happened in many places in Australia). Generally, in a period of ten yrs, the property may have doubled, but with inconsistent periods of growth. This may mean that for some investments purchased today, it will take 6-8 yrs for any gain to be realised.

As far as cashflow goes, it is still possible to obtain, using value adding, as you've mentioned, or changing the usage of a property. Don't we all want income streams from our investments? I know I do!

Affordability is the ultimate key, as has been mentioned. As long as people can still afford to buy, there will be demand. As long as lenders are willling to lend so generously and interest rates stay reasonable, there will be buyers.
Just some thoughts anyway...

 

[Nicholas H]

I did not forget that property is cyclical .. but if you take the cycle and average out it out .. if it stays above inflation then the affordability of house will go way out .. if it stay with inflation and how much people get payed then it will stay as affordable as it is now .. and just be in the same proportion .. I guess inflation is just an arbitory number that describes what is happing in the bigger world .. it does not control the value but reflects it. So if people wages and income is not going up much, then I can not see property prices going up .. which is reflected in what I meant by inflation ..

I know generally that something has to change to make it more affordably, if that is the amount people earn, like wage increase or the type of jobs people do in areas, if it goes from a workers background in to one where people earn more then affordability increases .. I am just using inflation as a nice easy measure of this.

 

[Les]

G'day NicholasH,

Whenever I hear Jan talk to this subject, she says that property tends to grow at 2 - 3% above inflation - i.e. NOT double !!! (And that is "over time" - so that might mean 4% one year, 7% the next, and 18% the year after that - i.e. it is NOT consistent...)

She explains this well in "Building Wealth in Changing Times" - check out your Library, as it is now out of print.

In short, even in low inflation periods, property does very well.

Property tends to react to "supply and demand" far more than any current inflation rate. Perhaps this goes some way to explaining the HUGE jump we've seen in property values over the last 3 years (even in a low inflation environment).

Regards,

 

[Aceyducey]

Nicholas,

Keep in mind that you don't buy the entire market, you buy a property in a single market.

What property overall does is irrelevent, all that's important is how YOUR properties do.

It's like shares, you want stock in companies that outperform.

So for your personal investing, look for areas that deliver good returns and ignore the global projections.

Cheers,

Aceyducey