It seems unlikely that capital city house prices will crash: Pete Wargent
Interesting article from Philip Soos charting Australian residential property history. Such debates often become polarised between those who own property (“prices always trend up”) and those who don’t (“housing bust!”). Typically what follows is degeneration into cheap shots (cf. “landlords are parasites”, “Soos is a uni student”), but there’s plenty of that dirge on the internet already.
Before delving further, I’ll clarify that I’m not simply suggesting placing an enormous leveraged bet on Australian residential property at today’s prices. A holistic financial plan should involve an element of averaging as the average investor is notoriously poor at market timing.
Graphs from 1861…
As a historian specifically interested in industrial and economic history from this era, I take interest in charts detailing trends from 1861. However, let’s be frank, residential property trends of 1861 bear zero relevance to the modern era.
As a Pom I was often presented with such charts in the 1990s past as irrefutable proof that property is wildly over-priced, but over a reasonable period of time homeowners and property investors remain way ahead of those in other asset classes (and in and around London prices simply continue to increase).
Admittedly, when I first got into property, I hadn’t considered whether it is an ethical practice. It’s common to vilify owners of property as leeches, but we can’t have the milk and beef from the capitalism cow. If Australia continues populating at a frantic pace someone needs to own rentals or the system fails.
It’s immature when faceless Tweeters dismiss Soos’ theories due to age (if you want to see what genuine student tripe looks like track down my analysis of Sheffield’s steel industry history/welfare state – utter dross). However, when it comes to finance and investment, there IS a key difference between theory and practice.
Household incomes have flown along in Australia in the modern era, in part due to high inflation in recent decades and an increase in the number of two-income households. Absent a return to high inflation it’s likely that household income growth will be lower in the future, although it’s a fair bet that Australia’s moderately inflationary environment will prevail given that is the Reserve’s stated target.
Suppose you buy a home today for $300,000 and take on a mortgage of $240,000. If price growth does correspond to a growth in household incomes of, say, 4% per annum, what do you think that property might be worth over a working lifetime of 45 years?
I won’t type the number (it’s close to a sixfold increase) as I’d doubtless be certified as a raving loon. Run some numbers and you’ll note that due to compounding growth even if the estimation is wildly over-optimistic by a staggering percentage, the vast implied margin of safety determines that you still don’t lose out. More pertinently, you will OWN an unencumbered asset which you may choose to sell and downsize to assist in funding your retirement, or rent out at tomorrow’s doubtless exorbitant rental values.
An alternative to “buying now” is renting and investing in a diversified portfolio of ‘productive assets’. My suggestion in this case is to implement a prudent averaging strategy into a well-diversified LIC which invests in the industrials index with its superior dividend streams.
We might reasonably expect to live in retirement for 20-30 years. If you’re to remain financially secure through such a time horizon you require a material retirement lump sum or annuity, and, ideally an unencumbered dwelling.
Now, suppose you'd taken the market-timing advice of the purveyors of doom since 2008, when Keen made his infamous “house prices will crash by 40%” prediction. Over the last half decade you'd have sold your house, watched the cost of renting increase horribly, and, following the more recent dreadful advice to short-sell the world’s fourth largest iron ore producer, sent yourself into a financial tailspin (if undertaking a leveraged CFD play, perhaps bankrupt). Worse still, property prices have tracked upwards.
Let’s be absolutely clear: if your financial plan involves owning nothing and then speculatively selling shares you don’t even own (into a raging bull market and without using a sell-stop order) in the vain hope of buying them back cheaper down the road – your destiny is likely to be drawing the Age Pension and adding to the Government’s pre-existing headaches. To build a sound financial future you need to own income-producing assets with a longer-term growth component.
Speculation: looking out
Are property owners "speculators"? It’s true that in the short term property ownership often involves holding cost (even with mortgage rates dropping to ~5.00%) . But over time rents tend to increase. Investment properties generate income as well as long-term compounding growth. As Ben Graham highlighted, the word 'speculation' comes from the Latin noun specula, a “look out”. So let’s “look out” at what’s on the horizon for Australia:Click to enlarge
ABS projections will not be accurate and nor do they profess to be, but the populations of Australia’s four major capital cities look likely to skyrocket. Again, we turn to policy: what are we doing to hold down the cost of land and new developments? Unless I'm missing something: nothing.
New developments are expensive and often inappropriately designed or located. Thus both homebuyers and investors clamour towards the “better value” established dwellings, particularly those located in comfortable, commutable proximity to the four major capitals.
This will be dismissed as a spruik, but if you’re genuinely concerned about the price of Australian housing you need to pick the right target: the Australian government. The challenges facing leadership with regards to housing are vast but not insurmountable: improved transport links, increasing the supply of appropriate land and dwellings, reforming the tax laws. If you think our leaders are equal to the task…you have more faith in them than I do.
Pete Wargent holds a range of finance and property qualifications and is the author of Get a Financial Grip – a simple plan for financial freedom.
The Mark at Sydney's Central Park
Much has been spoken about the global property market and that our market will ultimately follow a similar fate and I am always at pains to point out not all property is created equal.