There’s an old saying in Australia, property prices double every 10 years.
How true is this old saying? I was recently presenting financial analysis we had undertaken for a property portfolio. As we presented our findings, our assumed rates of return were questioned – why would you use such a low rate of return – historically property prices have double every 10 years?
Let’s jump down this rabbit hole.
We Aussie’s have an obsession over property. I get it, I love my property too and have also been lucky enough to be a beneficiary of this market. I will however be the first person to admit that it was through no skill whatsoever, nor did I anticipate to what extent this market would rise when I initially invested in property. My decisions are driven with specific objectives – a roof over my family’s head, investment properties in specific locations for income and future development potential to help my kids in the future, a beach house to get away from the hustle and bustle and spend time with my family. What I do with any of my properties are unlikely to be be influenced by what the market is doing, nor by what the market believes my property is worth. In fact I couldn’t care less.
Yet so many people have the equation so wrong – speculating on the price of land on the basis that property doubles every 10 years. Allow me to let you in on a little secret – the concept of property values doubling every 10 years is completely misleading. Don’t believe me? I’ve crunched the numbers, and here’s what I think.
I’ve summarised the return of the Melbourne property market for every decade beginning 1980 in the table below (median price). For example, for ten years ending 1990, the growth in the median price of Melbourne property was 237.93% – ridiculous, right!?
Table 1: Nominal 10 Year Return
Source: REIA, Core Logic
Based on the above table, I can understand why you may have been told (and believed) that property prices double every ten years – both the average and median percentage return for price rises have been over 100% since 1980.
Let’s take a look at what happens when you take into account inflation. The table below is the same as above, and I have calculated the Real Rate of Return in the third column. Take a look at the example we looked at earlier. The nominal (before inflation) return from 1980 to 1990 was 237%. When you take into account inflation, or the real return for the same period, was 55.06%. Although this is still a solid return, its certainly a far cry from 237%.
Table 2: Nominal & Real 10 Year Return
Source: REIA, Core Logic
Once you take inflation into account, the average and median ten year real return is 50.24% and 44.14% respectively.
Even though in Table 1 the average and median price rises are in excess of 100%, prices only increased more than 100%, 55% of the time – 45% of the time, prices did not double. Once you take inflation into account, since 1980, Melbourne median property prices have not double. Ever. During the decade ending 2005 they came close, returning 92.58%.
Now that we have established that real property prices don’t double every ten years (although my guess is that there will still be those who don’t believe me, and if this is you, reach out to me – we can chat further), I decided to analyse Melbourne’s rolling ten year real returns per annum. In other words, what was the real rate of return each year for every decade since 1940. For example, let’s say you purchased a Melbourne property in 1940 and held it for ten years, your actual real rate of return was about 9% pa. If you held property for ten years ending 1960, your annual return was a bit over 10% pa. If you held property for ten years ending 1987, your annual real return was 0% – yes, property can not grow in real terms.
The average annual real (after inflation) return for those holding property for ten years was about 4% pa since 1940 (ending 1950).
Here’s the chart. The blue line represents the return, the green dotted line is that average annual return, and the red dotted lines represent +/-1 and +/-2 standard deviation from the average.
Table 3 – Real Melbourne 10 year Rolling Growth (pa)
Source: Stapledon, ABS
What we can also see from the above chart, is that property goes through cycles – who would have thought!? Periods of high growth are followed by periods of low growth, and periods of low growth are followed by periods of high growth.
Where does this leave housing as an investment?
This is probably one of my favourite charts. It’s put together by Shane Oliver of AMP Capital and compares the long-term return of Australian residential property, Australian shares, Australian bonds, and Australian cash.
Source: AMP Capital
Since 1926 residential property has provided investors with a similar return to Australian shares – 11.1% pa to 11.5% pa.
As you can see from the above chart is that although Australian shares have performed slightly better, they have come with higher volatility. They are more liquid and easier to diversify, whereas property has been less volatile (partly because it’s not valued every single second of the day – unlike the share market), it is less liquid and harder to diversify.
Both shares and property have rewarded long term investors. In fact, shares and property tend to have low correlations with each other, meaning they typically don’t go up and down at the same time and at the same magnitude. Therefore, from a diversification point of view, there is a very strong case to hold both in your portfolio for the long-term.
I guess anyone can fudge the numbers to support whatever narrative they’re peddling. At the end of the day, the facts are the facts. You deserve to know the truth, it helps you manage your own expectations and make better investment decisions. Just because property prices haven’t doubled every ten years, doesn’t mean they won’t.