Graphs, graphs and damn statistics!
There is no shortage of articles quoting one “expert” or another about whether or not Australian residential property is currently in a bubble, ripe to boom again or just fair value. Every article seems to be accompanied by a barrage of graphs and statistical quotations to justify the author’s point of view.
If your eyes glaze over at the detailed graphs don’t worry, you’re not alone, often mine do too. I sometimes wonder (suspect) if the detailed graphs are purposeful anaesthesia to make the reader compliant to the author’s conclusions. (Hmm, I think that sentence may have done the same…)
Overvalued or fair value or…?
Really in the scheme of things if property is over or under-valued matters most if you are taking a short term trader’s view – trying to make money within a short time frame from a volatile asset.
What matters more is that new residential property investors are increasingly reliant on a continuing price boom in order to make a reasonable total return on investment (ROI).
With property prices and rents at current levels residential property investors make significant annual net income losses (even after tax returns). That creates a situation where a high capital growth is required to repay the debt, offset income losses and retain a reasonable return on equity.
Yes, my generation and those with an investing memory of about 15 years may say that residential property does generate really high capital growth. But the fact is that all you can say is that over that period it has done.
Can residential property continue to deliver high annualised capital growth over coming decades?
My helicopter view
Value is in the eye of the beholder. People seem to be willing to pay whatever they can to get something they really want. And Australians really want their own home – and a comfortable one at that.
In the last decade the amount of people bidding for property and their ability to pay has rapidly increased for reasons such as:
- Ability and willingness to borrow higher percentages of income.
- Ability to borrow higher percentages of the property value, meaning you needed to have saved less before you could compete in the market.
- Grants to property purchasers.
- Commencement of lending to a lot of the population previously shunned (e.g. employed yet unmarried females of baby-making age; and those with limited or mixed financial history.).
Consequently in many of our memories we have seen stellar above-average capital growth.
Can that ability and willingness to pay increase as rapidly over the next 40 years and thereby support continuing stellar capital growth?
It would require 40 years of:
- Above average wages growth
- Increased percentage disposable income through reduced lifestyle expenses (less kids and more frugal living – yeah right!)
- Low interest rates
- Increased willingness to lend by the banks
- More crazy Government subsidies
I’m not an economist so I don’t even pretend to have a crystal ball. But my rational mind says that in the long term gravity will kick in and force a return to normal long-term growth rates.
Therefore I expect that at some time there may be a sustained period of sideways or even negative growth (i.e. price declines.)
Predicting when that will occur matters most if you are taking a short term trader’s view.
I welcome your thoughts, reaction and responses to my view which you can in the comments section below.