House prices will be 55% higher in a decade: Christopher Joye

Where will house prices be in 10 years’ time? It’s a question that confronts almost every buyer. Framed differently, what are reasonable expectations for the return I will make on my biggest lifetime investment? 

We recently tried to tackle this subject through some independent analysis. In particular, we surveyed 21 leading market economists – including all the big bulls and bears – for their expectations of nominal house price growth over the next 10 years. To the best of our knowledge, a survey of this kind has never been conducted before. And the (anonymised) results, which I will come to shortly, are fascinating. 

Before commencing this test, our own projection was that, all else being equal, nominal house price appreciation would average about 4.5% per annum on the basis that this was a fair benchmark for disposable income growth over the ensuing decade. 

By way of historical context, disposable income on a per household basis has averaged a healthy 5.8% per annum over the plast 10 years, and 4.9% per annum over the past 18 years. 

Yet for a range of reasons that I have explained many times before – including the once-off, 40% plus reduction in nominal interest rates over the 1980 to 2011 period – historical house price appreciation has consistently outperformed disposable income growth. 

For example, we estimate that between 1982 and 2011 median Australian house prices rose at a 7.7% compound annual growth rate. 

Taking an alternative, and demonstrably more robust, approach, we examined every individual purchase and sale transaction in Australia since 1990 to work out what the median “buy-and-hold” return was. As the first chart below shows, this landed at a strikingly similar 7.8% per annum pace (before transaction/holding costs). 

Interestingly, the best and worst performing cities were Perth and Sydney, respectively. Since 1990 the median Perth home owner has realised an impressive 10.3% per annum capital return before including rents. Sydneysiders, on the other hand, have typically fared one-third worse.

Folks sometimes forget that in addition to (potential) capital growth, all housing assets generate income, one way or another. In the case of investment property, this is known as the rental yield. In respect of home-owners, it is called the “imputed” rent, or, in effect, the rent you save. 

If we take historical gross rents and cut them in half to control for residential transaction/holding costs, the ‘total return’ yielded by Aussie housing over the last 20 to 30 years creeps up into double-digit territory (see this article for our analysis). 

Yet these guides strike us as being far too ambitious when thinking about the future. Sure, if Westpac chief economist Bill Evans is right and the RBA slashes interest rates four times, we could see the housing market storm back with near double-digit gains, much like it did in 2009. 

And it is certainly true that housing is probably your best “hedge” (as the economy’s most interest rate-sensitive sector) in the event that the resources boom genuinely blows up and our central bank is compelled to change course.