The foolproof investment

I just noticed that the residex blog had a couple of interesting data tables containing the breakdown of growth in house and unit prices over various time periods according to their own indexes.

Houses

Area Median Value Growth Rent Sales Predictions
20 Years % p.a.
10 Years % p.a.
Year Ending
July 2011
Last Quarter
Last Month
Rate Month
Ending July 2011
Month Ending
July 2011
Month Ending
Jul 2010
Year Change
Year Change
5 year %p.a.
ACT $534,000 7.37% 9.67% 0.23% 0.08% -1.18% 4.59% $470 $460 2.17% -2.58% 1.08%
Adelaide $399,000 n/a 8.98% -2.44% -1.76% -1.06% 4.45% $340 $320 6.25% 0.17% 0.10%
SA Country $262,000 n/a 9.04% -0.18% -3.02% -0.52% 4.98% $250 $240 4.17% -6.47% -0.34%
Brisbane $436,500 6.92% 9.78% -6.04% -1.39% -1.06% 4.60% $385 $375 2.67% -21.78% 5.20%
QLD Country $369,000 6.50% 9.28% -4.09% -0.26% -0.60% 5.30% $375 $360 4.17% -13.71% 4.91%
Darwin $499,000 n/a 10.87% -2.84% -1.44% -0.24% 5.43% $520 $530 -1.89% -28.36% 6.14%
Northern Territory $470,000 n/a 11.02% -2.43% -0.36% 0.06% 5.75% $520 $505 2.97% -24.54% 5.27%
Hobart $379,000 n/a 11.21% -0.81% -0.44% -1.74% 4.82% $350 $340 2.94% -14.90% 6.69%
TAS Country $267,500 n/a 10.51% -0.11% 0.72% 1.18% 5.07% $260 $250 4.00% -11.40% 6.40%
Melbourne $586,500 7.73% 9.05% -0.92% -2.16% -1.24% 3.38% $380 $370 2.70% 7.55% 2.28%
VIC Country $328,000 6.55% 8.84% 4.66% -1.73% 0.01% 4.93% $310 $290 6.90% -2.26% 1.13%
Perth $471,000 8.78% 10.20% -3.90% -2.14% -0.82% 4.32% $390 $370 5.41% -13.39% 8.05%
WA Country $358,000 8.42% 10.30% 4.32% 2.57% -1.98% 4.81% $330 $300 10.00% -13.71% 7.48%
Sydney $674,500 6.84% 6.20% 0.96% 1.02% 0.12% 4.10% $530 $500 6.00% -21.44% 5.64%
NSW Country $340,000 6.33% 7.26% 1.24% -0.20% -0.70% 5.29% $345 $320 7.81% -23.14% 5.28%
Australia $436,000 n/a 9.00% -1.84% -1.70% -0.43% 4.49% $375 $360 4.17% -11.45% 4.43%

Units

Area Median Value Growth Rent Sales Predictions
20 Years % p.a.
10 Years % p.a.
Year Ending
July 2011
Last Quarter
Last Month
Rate Month
Ending July 2011
Month Ending
July 2011
Month Ending
Jul 2010
Year Change
Year Change
5 year %p.a.
ACT $428,500 7.60% 10.25% 1.38% -0.14% 1.61% 5.18% $425 $420 1.19% 7.02% -0.90%
Adelaide $308,000 n/a 10.13% -0.94% -3.54% -1.33% 4.91% $290 $270 7.41% -5.99% -0.66%
SA Country $234,500 n/a 8.12% 3.48% -0.46% -0.57% 4.23% $190 $185 2.70% -6.27% -0.71%
Brisbane $358,500 6.21% 9.50% -1.80% -1.56% -0.42% 5.10% $350 $350 0.00% -19.10% 1.75%
QLD Country $312,500 5.28% 8.40% -9.78% -4.47% -2.38% 5.34% $320 $310 3.23% -25.93% 2.71%
Darwin $391,000 n/a 10.84% -8.08% -2.81% -1.42% 5.60% $420 $440 -4.55% -29.56% 4.90%
Northern Territory $382,000 n/a 10.91% -6.81% -3.23% -1.52% 5.73% $420 $410 2.44% -28.61% 4.26%
Hobart $279,000 n/a 10.41% -1.13% -1.81% -0.87% 5.05% $270 $265 1.89% -17.93% 6.20%
TAS Country $207,000 n/a 10.03% -5.32% -5.10% -1.86% 5.54% $220 $200 10.00% -17.99% 5.71%
Melbourne $449,500 7.41% 8.19% -1.40% -1.60% 0.37% 4.18% $360 $350 2.86% -2.66% 2.91%
VIC Country $261,000 6.22% 9.06% 3.49% -0.45% 1.32% 5.19% $260 $230 13.04% -14.24% 0.15%
Perth $388,500 7.59% 10.08% -5.96% -0.24% -1.95% 5.04% $375 $360 4.17% -15.51% 1.25%
WA Country $297,500 6.20% 7.03% -6.77% -0.05% 2.15% 5.43% $310 $290 6.90% -21.35% 2.21%
Sydney $488,000 6.26% 5.62% 3.09% 1.11% 0.57% 4.81% $450 $440 2.27% -13.68% 3.10%
NSW Country $300,500 5.37% 7.03% -0.83% -1.02% -0.37% 4.95% $285 $275 3.64% -16.53% 2.13%
Australia $398,500 n/a 7.28% -0.74% -0.84% 0.22% 4.71% $360 $355 1.41% -13.08% 2.76%

You can see that the current period is not something people in Australia are accustomed to, and you can certainly see why older generations of Australians have a “you can’t lose with housing” attitude to investing.

That may of course have something to do with this chart.

 

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Comments

    • But they’ve gone down so they must go up! (i.e. Revert to mean only works in the upwards direction…)

  1. Thank you !
    The M3 graph sums it up nicely.

    All the clueless commentators keep pumping out the nonsense about supply and demand, immigration and population growth, housing restrictions, interest rates and government subsidies.

    The elephant in the room is M3. Credit growth IS the cause of the housing bubble, but the RBA will never be blamed for their contribution to this disaster-waiting-to-happen.

    • Spot on my friend. People enjoyed the constant monetary expansion but how will they feal when it goes into reverse as it no doubt will in next 1-2yrs.

      Debt deflation anyone ?

    • Credit growth is A CAUSE but not the only cause. Supply constraints have played a major role too as they ensure that the extra credit demand manifests in higher prices rather than increased home construction. The higher prices then encourages speculators to enter the market in order to chase capital gain, as well as ‘panic buying’ from FHBs, which kicks the cycle off again.

      More resonsive supply is a key circuit breaker stoping the positive feedback loop of higher prices -> increased demand -> higher prices…

      • Unconventional economist – the doubts that I had of if we were in a bubble; you had basically wiped them all out with that sentence. I love how asset prices are a function of asset prices.

  2. Everyone hates CPI inflation, because it diminishes our purchasing power.

    But, most economists would argue asset inflation isn’t “inflation”, as everyone benefit from its wealth effect.

    So what could be the consequence of low interest rates within an asset inflation environment?

    You will see leveraged household bet on housing – as “safe” as house.

    It happened in almost everywhere!

    http://www.economist.com/node/4079027

    • The problem with this is that in the end all assets must be backed by the real economy eventually because that’s where they derive their value from – ie how much money can you get out of it. debt causes asset inflation which changes the equation in the short term allowing assets to be bid up higher then what they can sustain. I.e the greater fool theory

  3. Do You Feel Lucky Punk?

    I have to admit that I am not a house owner (i.e. to many I am a leper and an object of pity 🙂 ), and don’t follow the housing debate that closely, but surely if housing price growth out paces income growth then at some point housing become unaffordable. Which means at some point house prices must drop or income must rise. Is that an over simplification?

    we need housing to be viewed as an expense rather than a risk free path to riches.

    Additionally, perhaps a further over simplification, at some point ponzi schemes collapse. There is an upper limit to how much debt the aggregate of punters can take on and that limit also creates another cap on prices (the bloggers might like to offer an opinion about how close we are to that limit).

    • Spot on DYFLP, both with regards to the basic math of house price and income growth as well as the reference to a ponzi scheme. And none other than Adam Smith has described housing as an expense that adds nothing to productive out – it cannot create wealth as any price increase means a corresponsing purchasing power decrease for propsetive buyers.

    • With regards to the debt saturation limit – if you can work that one out let me know and we’ll split the profits from shorting the Aussie banks at the exact right moment. Prof Steve Keen believes it’s about 150% of GDP (correct me if my memory fails fellow bloggers), but there’s no empirical evidence as economies have never ventured into this much mortgage debt before. The US, UK and Ireland are the best current guides – prices continue to slide in the US. Eeep.

    • DYFLP and Q – Would it not be more accurate to say that if the cost of servicing housing debt outpaces income, then at some point housing becomes unaffordable? House prices could rise and incomes stagnate, provided that debt became cheaper and/or loan terms are extended.

      Also, theoretically as long as the population continues to grow, then a Ponzi scheme does not end in collapse.

      • Do You Feel Lucky Punk?

        Good points monkey. Also highlights the traps for young players e.g. increase debt when rates are low, get smashed when rates rise.

        re: population. it is not just growth per se. the bloggers would have written about this but it is the overall demographics. e.g. As more retirees “come online” that should take steam out of the ponzi market.

  4. Here’s a great paper from the US – it’s lucky that things are different here. http://www.fma.org/NY/Papers/Lessons_from_30_years_of_Buy_vs_Rent_Decisions.pdf

    The conclusion?

    “When the U.S. as a whole is considered, renting was preferred to buying 75% of the time. On average, the annual required appreciation return was 2.04% higher than the actual appreciation. In retrospect, the period spanning the mid 1990s to the early 2000s was the only time frame in which buying was preferred to renting.

    This narrow time period is associated with homeowners that purchased a home just before the recent boom and sold it shortly before its sequential bust. However, because most homeowners never transfer back to be renters, it seems unlikely that most homeowners, who benefitted from home appreciation during the boom period, avoided the subsequent housing collapse.”

  5. “the bloggers might like to offer an opinion about how close we are to that limit”.

    I think we’ve hit the limit hard, the RE industry is still a bit dazed from the hard knock, but it will wake up, then watch out below.

  6. even with the most powerful “printing press” no government would be able to print that (M3) much. That is why Q1,2,3 BE1,2,3,4,5 … are not inflatory.

    Once banks stop lending game is over, no matter what governments do

    With banks at the edge, oversupply of homes everywhere economy is screwed, boomer investors even more.

    • Never underestimate governments, their stupidity and the ignorance of the people to trust their government to do “whatever it takes” to save them.

      America will qe until the money does trickle down I believe – even if Its the smallest amount and inequality grows substantially.

      The best western countries can hope for is a sudden crash so that they don’t have the chance to subject people to this horrible solution.

      Damn I’m cynical.

  7. I don’t have the data for AU, but for the USA historically P/E ratios for homes is around 20, i.e. a yield of 5%. On that basis, rental yields in most cities as per the above chart (around 4.5%+) seem to be ok and rents are rising. So cant people rent their homes(instead of sell) and live with a yield of 5%? Unless you are in serious distress and simply have to sell.

    • Have you got a link to back up the historic US P/E ratio?

      Of course people can rent our their houses as long as they are happy with yield of 4.5% (before expenses of roughly 2% – so 2.5% net before tax) and can pay the mortgage.

      The question is whether you would really want to do that when you can earn more money in the bank and there is such downside price risk.