Aussie housing market outperforms shares, with significantly less risk

What’s been the best store of wealth over the last decade? It’s a question I will seek to quickly address today. 

In order to do so, I have taken all the major asset class information over the period January 2001 through to July 2011. This spans a number of economic and financial market booms and busts. 

Australian house prices had a stellar run through to end 2003, but then went nowhere for a couple of years. They recovered at a sprightly clip over 2006 and 2007 yet came to a grinding halt in 2008. A combination of 9.6% mortgage rates and the GFC conspired to push national prices down about 2.6% over the 2008 calendar year. 

In 2009 and 2010 we saw the Aussie housing market shake off these headwinds. Indeed, the RBA’s reduction in mortgage rates to around 5% supplied ample momentum. 

But as is the case with all good things, they tend not to last. And the RBA has prudently started to apply the interest rate brakes as inflation pressures have reared their ugly head. The coincidence of two de facto rate hikes in November last year with the community presumption that many more are to come has seen prices cool 2% year-on-year. 

The Australian share market had a slow start to the 2000s, and even after incorporating the benefit of dividends fell by 8% in 2001, and a much more painful 15% in 2003. 

Following this nadir, Aussie shares rebounded very vigorously indeed through to their late 2007 peak. As most now know, Australian and global shares (including dividends) suffered a catastrophic 40% to 50% slide during the GFC and still remain more than 20% below that peak. 

In the chart and table that follow (click to enlarge) I compare Aussie housing, Aussie shares, government bonds, and cash, over the past 11 years. The specific data I have used include the ASX All Ordinaries Accumulation Index (which reinvests dividends), the RP Data-Rismark Combined Capital Cities Index plus 50% (or half) of the RP Data-Rismark hedonically-estimated gross rents (to control for around 2% pa worth of property costs), the total returns realised by 10-year Australian government bonds, and the total returns delivered by 90-day bank bills.

The chart suggests that a national portfolio of housing has comprehensively outperformed all other investment categories over this tumultuous period. What is also fascinating is that AAA-rated Australian government bonds have delivered almost the same returns as Australian shares (plus dividends) with vastly lower risk. 

On the question of risk, the table below shows us that there have been five months over the last 11 years where Aussie shares have fallen in value by more than 5% (the worst being a stunning 14% loss). None of the other asset classes have had a single monthly loss of five per cent plus. 

Christopher Joye is a leading financial economist and works with Rismark International. Rismark and RP Data provide house price analytics products, and solutions that enable investors to go long and/or short the housing market. The above article is not investment advice.