Gonski is wrong about house prices. Buying property is, quite simply, a no-brainer.
Gonski is wrong about house prices. Buying property is, quite simply, a no-brainer.; We know prices fall at times. The issue is whether purchasing property makes sense.
David Gonski made a ridiculous comment last week when he stated, "The fact is, anyone who believes [house] prices always go up is, I think, a fool". It’s vacuous, because no one actually believes that as literal fact. I've not heard nor read anyone ever suggest house prices always rise -- not even the most aggressive spruiker -- and comments like that make no contribution to the broader policy discussion.
The issue isn't whether house prices fall; we know they do at times. The issue is whether purchasing property makes sense, whether it’s an intelligent decision and enhances wealth (for either owner-occupiers or investors) over a reasonable time period. The answer is an unequivocal yes and it’s foolish -- not to mention extremely misleading -- for Gonski and others to imply otherwise.
For those with the capacity, the decision on property involves a simple choice as to which side of the wealth divide they want to sit on. Rob Burgess highlighted the importance of this issue (in regards to retirees who maybe didn't have that capacity) in his piece (A house-price curse for retirees, August 29). The fact is, people are already worse off for not having owned property and it is naïve to suggest this is going to change.
With that in mind, anyone who follows the tripe sprouted by those who would try to talk down the property market are, quite simply, doing themselves and their children a grave disservice because on any reasonable time frame, prices do only go up. This is an undeniable truism and you only have to look at a chart provided by the Reserve Bank of Australia to see this.
As you can see from the chart, the trend is up! It’s pointless to dispute that. Indeed there has really only been two periods of stasis in the past 60 years: the mid-1970s to the late '80s and then again from the early-to-late '90s. But go back to the macro settings we saw back then: annual inflation rates of 10 per cent or more (up to the early '90s) and mortgage rates from about 9 per cent to 17 per cent. Over that 20-year period, the lowest interest rate was 8.4 per cent. The average was closer to 12 per cent and at the peak, you were paying 17 per cent.
Those double-digit inflation rates are important as well by the way, as the chart above shows real inflation-adjusted house prices. Double-digit inflation through the '70s and '80s hides the fact that nominal house prices were still probably going up by about 7 or 8 per cent per year. It’s not so much that house prices were falling, it’s just they couldn't keep pace with rampant out-of-control consumer inflation.
Against that backdrop, cherry picking short periods where house prices have fallen or have flatlined, such as in Sydney from 2004 to 2009, are disingenuous. Sure, if you bought at the peak in 2003 and sold at the trough three years later, you lost money.
Then again if you still hold that property you are up more than 50 per cent in capital gains alone and your total returns are more like 80 per cent or 7 to 8 per cent per annum. Those periods don’t prove that property is a bad investment, just that you probably shouldn’t be in it for the short term. The holding period is important, but then again that’s the case with all investments.
Now think about the macro settings we have today. Lending rates sub-5 per cent -- you can fix sub-5 per cent for five years! Inflation is comparatively low (2.75 per cent on average). It’s a different world, and according to consensus that world isn’t going to change too much. Inflation is dead. There is deflation in Japan, Europe and if the US doesn’t flirt with outright deflation, then it oscillates between mild inflation and disinflation.
Similarly, the RBA isn’t about to start hiking rates and indeed we have very vocal calls to cut rates further. Should a miracle occur and the RBA does decide to set rates more appropriately, well, we already have it from them that rates aren’t going up by much. Interest rates will remain low, even after they’ve been tightened, even if inflation rises. This we know as fact since central banks simply look through bouts of inflation and forecast lower inflation. This is what the Bank of England and the Federal Reserve have both done.
In the meantime, land and property are a finite resource, the scarcity of which is exacerbated by deliberate policy decisions to lift population density rather provide adequate infrastructure into satellite towns and regions. Population growth is strong, and outside of a surge in inner city apartments we’re still not building -- and nor is there any sign that we’re about to start building -- adequate stock of detached housing or any dwelling stock, outside of inner-city areas.
Buying property is, quite simply, a no-brainier with the policy settings and the supply demand dynamics we have in place now. I can’t really see that changing in the foreseeable future. People can and will still lose money if they throw caution to the wind and don’t do their research.
But, I don’t think anyone should be concerned about a sustained or broad-based price fall. In those periods where we have seen real prices go down, this has been associated with extremely high inflation and interest rates. We are nowhere near that world now. Neither do we have the conditions that saw house price slumps in the US and other countries.
As a final point, macroprudential regulation, when it is inevitably put in place, won’t prevent house prices rising either. It will do nothing other than exacerbate the already growing wealth divide by making it harder for lower income earners and first home buyers -- who typically have higher loan-to-value ratios by necessity -- to take advantage of the lowest interest rates in a generation.
Is this a joke? I've heard this claim from many, many people over the years.
And then in the 4th paragraph, he claims exactly this.
Who takes these kinds of articles seriously?
Ah, no, there's a subtle difference between "always rising" and "always rising over a long enough time period" (which is what Carr alludes to). Observe his chart closely, and you'll notice dips, many of them, and these represent times when prices fell. But zoom out and take in the big picture, the long term trend is always up. That is, if you take a reasonably long time frame, let us say ten years, nominal prices will always move up between the start point and end point (note also the chart is real not nominal). This is a subtlety of the "prices always rise" argument that many novices miss.
Ah, no, there's a subtle difference between "always rising" and "always rising over a long enough time period" (which is what Carr alludes to). Observe his chart closely, and you'll notice dips, many of them, and these represent times when prices fell. But zoom out and take in the big picture, the long term trend is always up. That is, if you take a reasonably long time frame, let us say ten years, nominal prices will always move up between the start point and end point (note also the chart is real not nominal). This is a subtlety of the "prices always rise" argument that many novices miss.
If he was trying to make a nuanced point, then he should have used far more precise language.
Why did he choose to start the graph at around 1950? We have reliable data going back at least another 50 years, and it tells a different story.
Let’s throw some fundamentals into the mix, which weaken Carr’s argument.
First, wages growth is the weakest in decades (negative in real terms) and is likely to remain that way as the commodity price boom unwinds. Even the Treasury is tipping the weakest real per capita income growth in recorded history over the next decade.
Second, contrary to Carr’s previously bullish claims, the labour market is soft and is likely to deteriorate as the once-in-a-century mining investment boom unwinds and the local car assembly industry shutters by 2017.
Third, there are few other growth drivers for the economy. Other than a short-term mini boom in dwelling construction – which itself is likely to weaken house prices and will probably fade next year anyway – what else is supporting the Australian economy now that both mining and manufacturing are in decline?
Fourth, the forces currently driving house prices are likely to fade. Does Carr honestly believe that the investor-led boom, which has seen nearly one-in-every two dollar of mortgages (excluding refinancings) going to investors, is sustainable? Or that immigration and population growth will remain at its current high level once the domestic economy weakens?
Fifth, the banks are likely to suffer some kind of credit event in the not too distant future, which could reduce the availability of credit to borrowers. This could take the form of belated macro-prudential controls on mortgage lending, or reduced access to offshore funding via a ratings downgrade or an external shock.
Finally, over the long term the demographic headwinds that played a central role in supporting rising house prices in recent decades have peaked and are already reversing.
In short, there are enough risks on the horizon to counter Carr’s panglosian view that Australian housing is a one-way bet. Valuations are already at or near near all-time highs and housing is getting riskier by the day as prices continue to rise in the face of the slowing economy.
If he was trying to make a nuanced point, then he should have used far more precise language.
Why did he choose to start the graph at around 1950? We have reliable data going back at least another 50 years, and it tells a different story.
No. We have reliable data going back at most to about 1970. The Stapledon estimates before that are based on a tiny sample of transactions, and the further back you go the sketchier it gets. Possibly a fine piece of work, but based on extrapolation, interpolation and guesswork, not actual sales data.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
According to my colleague Adam Carr, “buying property is, quite simply, a no-brainer” because “on any reasonable time frame, prices do only go up”. In the current circumstances, it’d be tough to find a more bullish take on the property market short of seeking the views of a real estate agent or property developer.
But is it simply enough to look at past returns and declare property a safe bet? If anything, past performance provides the biggest red flag for property; there surely isn’t a better example of the old adage ‘past performance is no guarantee of future performance’.
It goes without saying that Australian property has been an amazing investment for a number of decades. If you purchased a property in the 1980s or 1990s there’s a good chance your mortgage is paid off and you’re sitting on a million dollar asset.
Some of those gains reflected savvy investment but, for the most part, the high returns to housing reflect a number of structural shifts and favourable government policies. There’s no reason to believe that these gains can be replicated by the generations that follow.
The starting point was banking deregulation that began in the mid-1980s, which kicked off a credit binge that saw household credit rise from 45 per cent of nominal GDP in 1990 to 114 per cent in 2014.
This was supported by a range of demographic factors; the first ‘baby boomers’ hit 35 years of age in 1981 – considered prime working age – and income growth soared. But that paled in comparison to changing social norms; the labour force participation rate among women increased from 44 per cent in 1980 to almost 59 per cent in 2014.
The 1990s and 2000s poured fuel on an already raging fire. In 1999 the Howard government decided to halve the capital gains tax, which made property investment more desirable, and then they introduced the first home owner grant in 2000.
Finally, we shouldn’t forget that these structural shifts happened in the midst of 23 years of uninterrupted growth and a once-in-a-lifetime terms-of-trade boom. Could conditions have been more favourable for the housing sector?
Structurally the economy is once again shifting but this time the developments are not so favourable. An ageing population is weighing on both labour force participation and income growth; neither is being helped by the sharp decline in our terms-of-trade. The federal Treasury is predicting a sharp decline in per capita real GDP and income growth over the next decade.
Favourable housing policies – such as negative gearing and the capital gains tax concession – are well established and factored into house prices. These policies support elevated property prices but they are not a continuous source of growth.
Credit growth has picked up recently but remains well below its level throughout the 1990s and early 2000s. Despite low interest rates, household debt has stagnated as a share of nominal GDP and credit growth of 20 per cent year-after-year no longer appears possible.
Whichever way you cut it the odds are stacked against the housing market. Replicating past gains – particularly over the last quarter century – is almost impossible. House prices may continue to rise but the gains will be a mere fraction of what investors have grown to expect in recent decades. On that basis, property may not be as appealing to investors as shares or bonds.
Despite what Carr implies property investment requires more rigour than simply looking at long-run housing graphs. To truly appreciate the Australian property market and assess its investment potential, we must dig below the surface and understand the structural and political factors that allowed house prices to grow so strongly in the first place.
In doing so we can only conclude that income and house price growth will be weaker than in previous generations. By virtue of being born at the right time, housing has been an amazing investment for the ‘baby boomers’ but the generations that followed have enjoyed no such luck.
Contrary to what Carr says analysts who are bearish on the housing market are not “doing themselves or their children a grave disservice”; instead they have simply realised that Australia’s economic boom is over and the housing market is no longer the safe bet it once was.
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