The Bursting of a Property Bubble
Australian property prices are a bubble, and the bursting of the bubble is imminent. This is the narrative by most commentators and finance experts. As the financial year comes to an end, scoreboards are being updated and the analysis begins.
Here's the current state of play for the Australian property market. Sydney led the charge, growing 15% in 12 months, with Adelaide (13.9%), Brisbane (13.2%), and Perth (9.8%) following. Surprisingly, Melbourne lagging the pack, growing 7.7%.
This my friends, is the dizzy growth rates in property prices we've seen since the pandemic. Meanwhile, stock markets around the world have risen between 20% - 80%.
The run up in prices has been attributed to a number of factors, low interest rates, low stock, and unprecedented monetary and fiscal stimulus. Sure, prices rising at these rates each and every year is not normal, nor is it sustainable - both in property markets and in equity markets. Yet as bank lending continues to expand, any signs of a turnaround in prices is dim - and I wouldn't be holding my breath.
Before we get too excited about what we've seen over the last 12 months, I wanted to take a look at how prices have performed over the last 25 years - you know, taking a longer-term view and putting the recent rises into perspective. And so I did.
If you thought the last 12 months was crazy, take a seat before you look at these numbers.
Melbourne leading the charge, growing by 435%, Sydney by 368%, Adelaide by 264%, Brisbane by 241%, and Perth by 178%.
Sure, these numbers look big. Let me annualise them for you:
Melbourne: 6.94% pa
Sydney: 6.37% pa
How outrageous are these annualised growth rates - ha! Allow me to give you even further clarity on these numbers. I then went further and adjusted the returns for inflation.
Here are the results:
Melbourne: 4.32% pa
Sydney: 3.61% pa
Adelaide: 2.75% pa
Brisbane: 2.45% pa
Perth: 1.75% pa
Melbourne, the Australian city whose property prices have ballooned out of control has grown at a very, allow me to say it, underwhelming rate of 4.32% pa for the last 25 years. Cool your jets Karen, I'm not sure if a rate of 4.32% pa in real terms is that outrageous.
Stop watching financial pornography. It's not what's happening in real life. Have prices risen rapidly over the last 12 months? Of course they have. Does this happen each and every year? No. Will the market cool down? Yes. Does anyone know when and by how much? If anyone claims they do, they're either a liar or a fool. And you'd be even more foolish for buying into their hallucinations.
Market's rise and market's fall. The problem for investors is that we get so caught up in what is going on in the now that we extrapolate the current situation out into the future - it's called recency bias. And guess what, it's a cognitive human bias, and you and I are both human beings. It's okay, don't beat yourself up over it.
Whether the market is going up, or it's supposed to be going down, think about the objective of the investment. What is it's purpose? Believe me, it's not easy to do, but once you can crack this way of thinking and investing, your decision making will be much clearer and far less cloudy.
You don't design a house based on the weather forecast, so why do you invest in such a way.