Myth busted: house prices don’t double every 10 years

CoreLogic has released data showing the growth in dwelling values across major jurisdictions over both the short-term (monthly) and very long-term (20-years):

As you can see, the data clearly busts the common myth that Australian dwelling values double in value every 10 years. For this to hold true, a compound annual growth rate of 7.2% would be required, which is above the actual growth rates recorded across all markets over the past 10 or 20 years.

For what it’s worth, Melbourne and Hobart come closest to meeting this ‘doubles every 10 years’ myth, each recording growth of 6.2% over the past 20 years.

Leith van Onselen
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    4.1 Prices rise on average

    The first important fact that emerges from the data is that between 1870 and 2012, real house
    prices increased in all advanced economies. The (unweighted) mean and median of the 14 house
    price indices are shown in Figure 15. Adjusted by the consumer price index, house prices in
    the early 21st-century are well above their late 19th-century level. On average, house prices in
    advanced economies have risen threefold since 1900, equivalent to an average annual real rate
    of growth of a little more than 1 percent. Note that this is lower than average annual GDP
    per capita growth of about 1.8 percent for the sample average. That is to say, house prices
    have risen significantly over the past 140 years relative to the consumer prices but have lagged
    income growth in most countries. We will return to this point later.

    • What is your point in posting that single paragraph? Especially when you read the subsequent ones?

      “Finally, in the past two decades preceding the 2008 global financial crisis, real house
      price growth outpaced income growth by a substantial margin”

      • And Australia in 2019, is probably in a very similar position to Spain in 2006. The BIG correction that is inevitable, will make a significant difference to even this long-term analysis. Straya dodged the sensible adjustment it should have had in 2008-2010, to return to long-run mean. This dodge can’t be repeated ad infinitum as each economic cycle comes to an end.

      • There was a bit on how on average house prices increased by inflation plus just over one percent.

    • Historically, something very interesting was going on during that very long period 1870 till today. What kind of houses did people live in to start with? Like for like, a 1990 house that “cost three times as much” was still a bargain. (This is no longer true because of the unique bubble condition that has occurred since then).

      There is an interesting “demand elasticity” effect as economic development occurs and value for money in different products and necessities, changes. Households used to spend 50 percent of their budgets on essential foodstuffs. There was essentially some kind of “monopoly rent” effect at work in foodstuffs, which obviously took priority over what could be gouged in payments for housing. So the monopoly rentiers in housing couldn’t extract quite so much as they can today, when foodstuffs are far better value.

      But “monopoly rent” in urban land also was eliminated over the decades when automobile-based expansion collapsed real land prices for housing. Society progressed from being tenants in hovels and tenements, to being owners of McMansions. They didn’t remain in hovels and tenements and “bank” the gains in value in the form of greatly reduced housing costs; they actually willingly spent more on housing costs because there was so much value now available for the dollar.

      There is a similar phenomenon at work when young people now consume smashed avocado and make toll calls without a second thought. Old people kind of recoil at the “extravagance” but the fact is that these things would have cost them a LOT more relative to their income. When something gets cheaper in real terms, often people consume more of it. Urban land got cheaper in real terms, and people started consuming around 30 times as much of it, AND spending a lot more on structures of larger size and higher quality. .

      This absolutely ceased to apply in the last couple of decades; urban land prices are now the subject of firstly, classic extractive, gouing monopoly economic rent; and secondly, a classic bubble, mania and delusion, just like what used to happen before automobility and superabundant land supply stabilized everything.

      • Arthur Schopenhauer

        Well reasoned post Phil.
        To take your reasoning a step further, land prices in sprawling cities like Sydney, Melbourne & south east Qld will inflate as tolerable car commuting times are reached. (No more peripheral land within tolerable 100km/hr freeway commute.)

        So if population rises, it’s either densification or extend the bounds of the periphery with a 300km/hr fast train commute.

        A grand ‘nation building’ fast train project can’t be to far off?

      • Arthur, thanks for the generous response. But the norm, when market forces are allowed, is for employment and all amenities to disperse as a city spreads out. Peter Gordon and various co-authors are the best writers on this subject. “Urban Dispersion and the Stability of Travel Times” is the kind of title they have been giving their papers for decades now.

  2. The thing that never fails to surprise me when you ask the house boosters is how long can house prices continue to outstrip inflation and wage growth. It’s an impossible mathematical formula which is guaranteed to result in a housing bust at some point.

    • I agree with your main point. But there is some justification for “dwelling prices” to be higher over the VERY long term simply because of the greatly increased inputs that make up the average dwelling. Look at the dwelling that average people lived in, in 1900. Also, cities grew considerably (most population was rural, once) and became much better appointed with amenities. The law of differential urban land rent means that the greater the growth, the greater the real long-term gain in value for existing housing stock, because they end up with “location advantage” priced in relative to the ever-expanding fringe.

      So there was some historical factual basis for regarding “Real Estate” as a good, inflation-beating long term investment.. But the last 20 years are something else altogether, a classic bubble complete with mania and delusion. The panic will come, and your point will be proven.

    • Correct.
      The truth of it is, house prices are actually little more than a reflection of monetary inflation rather than real wealth as they are bought with oodles of debt. If debt didn’t exist and people had to pay cash for everything then property prices would definitely be an accurate reflection of wealth.

      But then, property would also be a fraction of the price it is today.

  3. Most cities have slightly different cycles, for example, I’d expect Hobart has outperformed partly because it is still at or nearer the top of it’s current cycle, where other capitals have already corrected. If you move the start or end point back or forth a few years I’d expect results could shift a lot.

  4. What was it that the great man said:
    Every existing thing is born without reason, prolongs itself out of weakness, and dies by chance
    I’d say our Sydney Real Estate insanity is no different, having entered a period of weakness it strives with all it has to prolong itself, alas in the end its death will come by chance but certainly not by design, every step that’s humanly possible will be taken to prolong the weakness.
    But Chance knows nothing of time and waits patiently, Chance has no allegiances, Chance owes its existence to nobody, so in the end it all dies by Chance’s hand.

  5. Jumping jack flash

    Yes the whole “double every 7 to 10 years” thing is always backed up with “on average” (over the past 10,000 years)

    A true believer would say something catchy like “its not timing the market its time in the market” and other things like “if you try and pick the bottom you end up with a smelly finger”. The list goes on.

    However, I always take this “advice” with lots of salt because there’s nothing like carrying around an enormous pile of debt in these incredibly risky times to motivate the most stalwart Minskyian to change their perspectives on the economy and debt and productivity, and immigration, and turn a blind eye to every weird and amazing financial contortion our supreme leaders of the economy place it into to wring out the last skerrick of debt growth. This perspective change is in order to get everyone else on board with them so they don’t feel so bad about doing it.

    “See that person is doing the same thing as me, so what I’m doing is now ok”, and “If I’m going down underneath this gargantuan pile of debt, then I’m going to get as many people in with me so I’m not lonely when it all turns to the proverbial”.

    Both of these are powerful psychological forces and behind a lot of “advice” I’m sure.