Is property investment a “mugs game”?

The Australian’s James Kirby asks this very question today:

Nobody wants to believe it’s true but it’s becoming obvious that investment property as a source of income is fast becoming a mug’s game…

It’s the flip side of a mind-bending acceleration of residential property prices over the past two decades that has now left us with yields (or income from the property expressed as percentage of the property price) that are at unprecedented lows…

There is a deep problem here. Put simply, an older generation who thought they could live off income from investment property are very often extremely disappointed in the reality of investment property ownership…

A later generation who are buying at the levels where the yields are less than 3 per cent and trying to make it work by hoping for good price appreciation coupled with negative gearing have bigger problems — they are unlikely to make the profits of older generations and the income proposal is hopeless…

AMP chief economist Shane Oliver has just published an interesting exercise in which he attempts to explain residential investment property on the same metrics as shares…

On Oliver’s calculations, if we try to create a PE ratio for residential investment property, the PE is a whopping 50 times for residential property compared to about 12 times earnings a few decades ago…

As for trying to make an income from it in the meantime, owning property and hoping to make an income is a mugs game.

Gross rental yields – which do not factor in costs like land taxes, rates, maintenance and management fees- have collapsed to near record lows, according to CoreLogic, with Sydney and Melbourne most depressed:

This means that investing for income is a mugs game. It also suggests that dwelling values are way over-valued.

Thankfully, our partners at Nucleus Wealth (who run the MB Fund) have developed a free Australian Property Calculator, which helps you ascertain the merits of investing in property versus shares.

Give it a go and decide for yourself whether investing in property is indeed now a “mugs game”.

Leith van Onselen
Latest posts by Leith van Onselen (see all)

Comments

  1. Ask me that end of March after we settle on our house in Banyo (Brisbane Area) and we figure out how much we owe in taxes and what’s left for profit on a 16 year investment property.

    • Good news as noone buys an property for income (only NG losses)_
      Sharemarket is not expensive at 18 times earning. Will reach 50 times current P/E.
      Although as the sharemarket in Australia consists of 4 banks Im not sure how this will work…

      Everyone believes Houses at 10 % a year capital growth per year forever so Banks to double earnings ager 7 years.

    • Strange EconomicsMEMBER

      Good news as noone buys an property for income in the last 30 years anyway (only NG losses)_
      Sharemarket is not expensive at 18 times earning. Will reach 50 times current P/E.
      Although as the sharemarket in Australia consists of 4 banks Im not sure how this will work…

      Everyone believes Houses at 10 % a year capital growth per year forever so Banks to double earnings ager 7 years.

  2. Is there any impact of the falling AUD, as in do purchasers take it into account? Presumably it makes purchases cheaper, but don’t you loose quite a bit of purchasing power in a falling AUD environment?

    Do offshore purchasers take that into account in a structured way or does retail not really care. Does anyone know?

  3. There is a deep problem here. Put simply, an older generation who thought they could live off income from investment property are very often extremely disappointed in the reality of investment property ownership…

    Why are the older generation so down on living off the income and disappointed in the reality? Rents have risen inextricably. So have prices. It could hardly have been much better.

    • I expect it is significantly better to have invested the same amount via an SMSF into high dividend shares paying franking credits over that period.

      • Even better to have bought bitcoin at $30, but so what? Doesn’t mean they haven’t had an excellent wicket in property.

        • Sure. But the all-property boomers are now getting trumped at the BBQ by the shares-and-dividends crowd! How galling.

          The reality is, the most important thing is to be the smuggest boomer among your boomer mates. No wonder they are “disappointed in the reality of investing in property”.

        • For the record: boomer barbecues in 2021 are very sparse and empty affairs. Usually two or three people at most, each enjoying a different variety of baked beans from an ageing can. They meet at a different venue every time – and why not, almost every backyard in the neighbourhood is free, if getting slightly overgrown.

    • Was about to say the same thing. Properties acquired many years ago are spewing out rent at the moment and will have a nice capital gain to leave the kids.

      • Strange EconomicsMEMBER

        The kids had better be good and not vote for that evil franking credit party or they are not getting anything.
        Yep ScoMo will get the family vote…

    • … for the early birds. Of course, if you extrapolate what went before then of course it’s guaranteed riches into retirement.

      A P/E of 12 in yesteryear vs a P/E of 50 today: “Do you feel lucky, punk?”

    • yes exactly

      The yields that the people who bought in the 1980s have only gone UP when calculated on the purchase price

      What is this absolute f’ing nonsense?

  4. Chart shows rental yields now exceeding bond yields for the first time ever
    Ratio used to be 2.0 now its 0.3

    And we’re supposed to believe its a bad investment?

    Just highlights the absurdity of the position of many people here

    • Clearly 10 yr bonds are a much worse investment, but that seems to have been glossed over, because narrative.

      • I don’t expect many people are all-in just in 10 year bonds over their lifetimes. Plenty seem to be all-in investment properties. The only fair comparison is with a typical share portfolio weighted heavily towards blue chip dividend yielding shares, possibly with some bonds. That is the typical Australian alternative to all-property.

    • There is no equivalence. Bonds are AAA-rated and notionally risk-free. And there is always liquidity in them.

      Property is highly illiquid at the best of times and at the worst, you’ll be lucky to get a bid at all – at least at anything approximating a sensible price. Risk-adjusted return is what matters and adjusted for risk, property returns are farcking atrocious. All that keeps people interested is the ‘belief’ that property will only ever go up – and if you believe that then good luck to you.

      • Ok but there is an easy way to compare them

        Once upon a time property returned 2x what bonds returned

        Now they return 0.3x

        Now, why is that?
        Bond traders and banks are stupid?
        The two largest markets in Australia are completely wrong?

        Or they appreciate that interest rates are never, ever, ever going up
        And immigration is never, ever, ever going to retrace

        The article states “that investment property as a source of income is fast becoming a mug’s game”

        It doesn’t make the statement that this is because property yields are on the verge of complete collapse

        Because that is obviously nonsense
        Construction is contracting, immigration is increasing

        These are the inputs that matter for rents

        “Oh but unemployment/wages” – no worries, we’ll just increase the number of people per domicile so that we can afford to maintain rents

          • Throwing more people at the problem has had diminishing returns, much like cutting the rates. Growth is anemic with all the people and rate cuts, once the boomers are out we’re just left with very highly leveraged owners who don’t have any money to spend in the real economy.

        • “Once upon a time property returned 2x what bonds returned
          Now they return 0.3x”

          That statement proves my case, not yours. If property returns a lot less (relative to bonds) than it did back in the day then it means that property is expensive relative to bonds. Read what you wrote.

          We’ve already seen that with the rental sector tightening up rents are still tea-bagging. I wonder why that is – oh, that’ll be because vibrants are now living 6 to a room rather than 4 i.e. no incremental demand increase. Most of these farckers are dirt poor – they are literally surviving long enough that they can get PR and then citizenship. They will not be material drivers of the property market going forward. We will have a deep recession soon and that will be it – game over.

          • Bond yields are low because bond traders know the RBA is going to end up buying the entire issuance

            They will do this to stave off a recession that is never going to come because when yields hit 0 or negative the government will have carte Blanche to launch into whatever MMT is required to maintain stable employment and GDP

            The state will have purchased all existing debt leaving us in a zero yield universe

            And you will regret not having bought land (which is essentially an infinite term bond)

        • So, what you’re saying is that, if I buy a bond I can earn some income and am guaranteed capital appreciation too as rates tend to zero — and there are zero outgoings, but that, if I buy property which has large entry and exit costs and constant outgoings: rates, land taxes, maintenance, etc I’d still be better off?

          Yeah, nah, I’m not convinced. Your theory buys heavily into the ‘greater fool’ theory which essentially relies on there being a greater fool to pay a higher price for your asset than you paid to begin with – capital appreciation representing the entirety of your return. ‘Hope’ is generally not a good investment strategy – at least you won’t find it in any textbooks I can think of.

          • So you wouldn’t buy property that returns 2-3x what bonds do just because of entry and exit costs?

            Let’s face it Dominic

            UBI and MMT are coming

            There will never be a recession

            Equally there will never be inflation

            Interest rates will never rise

            Capitalism is dead

          • Jumping jack flash

            We are going to get some pretty wild policies very soon concerning debt availability. Everyone is onto wage theft now, so that avenue is quickly closing as an effective method to get enough income to get over the line for the amounts of debt that are required.

            “Capitalism is dead”

            Not at all. What we’re seeing is capitalism on crack. It has been distilled to its lemony essence and then exploited. Its far from dead. The fact that we all still strive for capital is proof of that.

          • Huh? If UBI and MMT do come, then there will be massive inflation or hyperinflation. Leaving interest rates low will not change that.

          • @Sidious
            Yep, I don’t get that. MMT and / or UBI are almost certain to end in sharply higher inflation.

          • What inflation?

            We’ve been creating trillions of new dollars through creation of loans

            A bit of unfunded government spending isn’t going to make a dent

            In any case, they will ignore inflation like they always do

            Honestly, you guys are very naive

            As if these friendly rich people are just going to let a market collapse even things out again
            Asset price inflation is an instrument of class oppression at this point

          • @Coming
            The build up of monetary inflation has been offset to some extent by technological advances and globalism (1990s through the GFC) and yet is everywhere you care to look: most topically, house and land prices, healthcare, private and tertiary education, utilities etc. There has been deflation in clothing (but no longer) and electronics (still some deflation here) and base commodities (for now). Low rates have caused a global glut in many commodities like steel (mainly excess capacity in China) which has depressed prices and assisted in keeping some costs lower.

            There is no such thing as the ‘general price level’ – inflation impacts the economy in discrete places, not broadly, but it does seep slowly into the areas of the economy that are not immediately impacted (like property). I’ve lost count of the number of food products in Coles that have gone up in price over the past couple of years – they are all trying to push through price hikes wherever they can get away with it. And where they can’t they’re having to discount periodically to boost sales (cash flow). Inflation is something that remains (optically) benign for a long time – and then suddenly makes an appearance in goods that impact all citizens on a day-to-day basis. And that’s when mindset shift from expectations of deflation (mainly manufactured by incessant central bank insistence) to inflation – when people start buying goods in bulk to stock up ahead of big price rises. That’s when the race to beat higher prices begins which begets higher prices and so on ..

            You watch. This will hit people like a Tyson special … “slowly, then suddenly”

          • Dominic, what is your thesis here?

            You think “inflation” is going to take off?
            Then why would you be buying bonds ?

            In any case, I know we have had inflation in real terms
            The point is that we have “looked through it” and we will continue to do so

            Land prices, food quality and size decreasing, health and education costs exploding, gas electricity costs exploding
            Eventually, we will be living 5 to a room eating rats and marsupials like our comrades in china

            The game is rigged

            The ruling class will never acknowledge or allow “inflation”
            They will similarly not allow deflation (of assets)
            Wealth inequality is the result of policy CHOICES both fiscal and monetary. It’s not a natural system
            I have not seen anything to suggest that the current regime is coming to an end

          • Of course, if you only distribute 1 cent per capita in MMT / UBI it will hardly make a difference. But if you distribute $1,000,000 per capita with everything else being equal, then you can be certain that prices of every item will skyrocket.

            Gold prices reflect real inflation. It exploded from $51 after the Nixon shock to over $2500 today.

        • You forget that high rents is making the Australian business sector uncompetitive. Companies will maintain minimum staff levels in Australia.

      • Interestingly, it is the very same government that issues the wonderful, liquid, default-free, AAA-rates bonds that is sitting there and making sure that property-only-ever-goes-up.

        Strange, hey Dom?

          • You say bonds are so farking great because the government behind them is.

            And the same government is choosing to use its greatness to underwrite property.

        • It’s irrelevant, because the bonds are linked to the fiscal health of the State whereas the property market is linked to the fiscal well-being of the people. In the longer run there will be a closer link because the State will have to bail out banks and buy RMBS but that day is not today.

          It’s pretty simple: if I own a bond today and I feel like I need to raise cash (or need to get the hell out of Dodge) I can sell it in the blink of an eye. If I own a property it could take several months to sell and every night I’ll lie awake sweating over it. A forced property sale can do a lot of financial damage in the same way that a forced bond sale won’t.

          To suggest there’s equivalence highlights extreme ignorance around the concept of ‘risk’. Many people claim they understand it – even bankers – but few actually grasp the concept properly.

  5. Jumping jack flash

    And this is one of the reasons why we need 5 trillion extra debt dollars by 2030. Why aren’t you all taking out a[nother] mortgage?
    The debt isn’t growing fast enough to counter the sucking effect of its interest. The economy is collapsing under the weight of the debt. Only more debt can save it.

    Property isn’t so much an “investment” as it is a store of wealth. It is the new gold, and far more useful. As the debt increases, so too does the value of houses. Its magical. It is working perfectly, as designed.

    We might as well do what the Chinese do and build entire cities and park the debt there and wait for it to double every 7 – 10 years. They’re way ahead of us in that regard.

    Super isn’t performing nearly as well over the same period as having a house. In fact, if you’re retiring with just super and no house(s) then forget the baked beans, you’re pretty much consigned to be eating catfood after about 7 – 10 years of retirement once all the super runs out.

  6. As soon as Dick Smith becomes Australia’s new PM, and lowers our population growth rates back to reasonable levels, the price of houses and apartments in Australia’s largest cities will halve. there