Do property prices double every 10 years?

Do property prices double every 10 years?

In his regular weekly column on Switzer John McGrath gave his thoughts on the year ahead in property.

Here’s what he said: mcgrath

There is an old saying in Australian real estate is that property prices double every 10 years.

The reason many people are sceptical of this equation is because this price doubling does not occur in a uniform line.

There is no neatly rounded 10% price gain every year in every market – we see low growth years and high growth years but when you add them all up over 10, you get about double growth.

This has been happening in Australia for the past century.

A recent CoreLogic RP Data report shows home values did indeed double – in fact they more than doubled, in the 10 years to January 2006.

Across the combined capitals, home values increased by 152%.

In the following 10 years to January 2016, home values didn’t do as well by comparison.

They rose by 72%.

But you have to remember that these are average percentages across a multitude of cities.

Buyers of Australian real estate should generally expect their properties to double in value every 10 years, especially in big city markets like Sydney and Melbourne; and especially if they buy well. Wednesday_questions_1_15_05

In order to give yourself the best possible chance of doubling your money in this timeframe – or even sooner, here are the things to consider when buying: 

1. The most important thing you can do is buy good quality properties in desirable locations close to essential amenities like schools, shops and transport

2. Buy properties with features that are always going to be in demand, such as open plan living spaces and alfresco dining spaces in the backyard

3. If there’s room to add value, that’s even better as a well-executed renovation or extension on a good quality home will enhance its value exponentially

4. Good quality properties in desirable locations will typically enjoy stronger capital gains over the long term, so buy with a 10 year minimum in mind if you can

Here is a fantastic graphic published by CoreLogic RP Data showing how property prices have risen in each city over the past two decades.

JMgraph

 

These graphs also give a few indications as to where property values are headed in the future.

Here are a few key insights from this data: 

1. Sydney will always be strong as the fundamentals contributing to prices rises such as undersupply, high population growth and being a hub of employment will not change calculator_house_money_12_06

2. Growth in Melbourne over the past 10 years has been outstanding and actually surpassed Sydney in both decades. Melbourne still offers better value for money than Sydney and I think its growth trajectory will continue for two reasons – it offers lots of employment just like Sydney; and it’s the obvious alternative for Sydneysiders who can’t afford Sydney prices

3. Brisbane, Adelaide and Perth are overdue for growth and stronger capital gains are likely over the decade to 2026

When we look at property over a 10 year period, it’s easy to see how well people can do out of bricks and mortar. It’s also a great reminder that the time to buy is always as soon as you can afford it; because no matter where we are in the cycle when you buy, the odds are you will double your money over the ensuing decade.

Just be conscious that it won’t happen in a straight line and you have to be prepared to ride out the lacklustre years in order to enjoy the phenomenal boom years like those we’ve just experienced in Sydney and Melbourne.

Kevin Turner
kevin@realestatetalk.com.au
2 Comments
  • Kathy
    Posted at 16:32h, 09 March Reply

    What utter rot. Property prices anywhere have never and will never double every seven to 10 years in the long run. This has been proven time and again by analysis of property prices in places where there many hundreds of years worth of records, for example Rome, London and Amsterdam. Anybody who peddles this rubbish immediately loses credibility with me.

    This is a fairly new phenomenon, which has really only occurred in the past 45-50 or so years, and somehow this has been extrapolated from “house prices rose significantly over the past 50 years” to “house prices double every seven to 10 years”. It coincided with, and is completely dependent on the availability of cheap credit, which was only available from late 1960’s/early 1970’s.

    This is a post I wrote recently about this very topic. It’s a bit long, but explains why this myth is untrue and how it came about:

    There are a lot of property myths out there about Australian property, but one of the most pervasive is that property supposedly doubles every seven to 10 years. But does it really?

    Anybody who bought property in the past 45 or so years has been the beneficiary of the huge loosening of credit brought about by US President Johnson in 1968 and US President Nixon in 1971 decoupling and then severing the link between the US dollar and gold. Prior to this, under the Bretton Woods agreement in 1944 the US dollar was backed by gold. The world’s currencies were also indirectly backed by gold, by virtue of the fact that the world’s currencies were valued against the US dollar on the exchange rate.

    That all changed when the gold link was severed. What that did, in essence, was to change the economy from gold backed to a credit backed and driven economy. This meant the economy would only grow if credit was increasing, so people were greatly encouraged to accumulate more debt by governments and central bankers. And many people were happy to oblige.

    This was never going to continue indefinitely. And in this low inflation, low interest environment, it is now starting to pull back.

    When looking at Australian house prices from about 1880 until late 1960’s/early 1970’s, prices were relatively flat, when adjusted for inflation. Once credit was loosened however, from the late 1960’s onward, house prices went parabolic over and above the inflation rates. The gains seen over the past 45 or so years are a product of this huge credit expansion.

    Pretty much anybody who purchased a house in that time benefitted from increasing property values. Unless they were actually located over a mine shaft, too close to the edge of an eroding cliff, bought at the top of a local bubble, eg. Gold Coast real estate during the 1970’s and 1980’s or they simply paid too much in the first place (which eventually corrected due to increasing prices), prices generally went up far in excess of the inflation rate.

    The people who benefitted from this windfall weren’t geniuses, they were just in the right place at the right time. But many thought they were because they made money each time they sold and because they didn’t understand the underlying parameters that allowed this to occur.

    So the myth of property prices doubling every seven to 10 years was born. The fact that this had only happened over the past 45 or so years, didn’t factor into the thinking. “Just over the past 45 years” somehow became “always”.

    There were even pretty graphs with a starting year point and an ending year point to support this “fact”, but once again, the data was extrapolated and prices averaged out over the time frame, rather than show actual annual prices for the period in question. And more often than not, these were not adjusted for inflation. As previously mentioned, property prices stayed fairly flat from 1880 until the late 1960’s/early 1970’s. They certainly didn’t double, for example, from 1910 to 1920 or 1930 to 1940, but the graphs made it appear as though it did.

    Now, however, in the current period of low inflation and low interest rates, I believe property prices are reverting back to the more normal mean of only increasing in line with inflation.

    Changing demographics as baby boomers retire and change from spenders into savers, will impact on house prices as well, particularly when they start to sell their assets to fund their retirement. Not just prices for property, but shares and businesses as well.

    The glut of flats being built in and around Australia’s capital cities will also have a dampening effect on housing prices, particularly in attached dwellings.

    Property price corrections could happen as soon as the 2017-2018 financial year, if not even sooner. This glut is mostly investor style stock in the form of tiny one or two bedroom flats. Some are so small you don’t need to bring your cat with you on inspection to know that you won’t be able to swing it in there. This represents a finite and small market. There are not many that have been designed for owner occupiers or families.

    The largest Australian demographic is still families with children, making up nearly half of households, and household sizes are also increasing, not decreasing. Of the other half of singles and couples not all of them necessarily want to live in a flat. According to Matusik the demand for this type of property represents a much smaller percentage than that for detached, semi-detached (with a garden) or small lot housing suitable for families with children and/or pets. And not a great deal is being built for aged care or people who want to age in place with single level, no stairs and no lift dwellings, although this is changing slowly.

    I can see a time very soon when even those who have managed to purchase and settle on these flats, will tire of low, no or even negative capital gain, low rental yields and longer vacancies due to the glut. However they still have to fork out every month to pay for the expenses.

    It doesn’t help that our greedy and lazy Councils and state governments are only too happy to keep adding more and more blocks of flats. The incentive for them is to keep this gravy train rolling on as long as it can as it represents the biggest return for them.

    The key here is the long term. In the short term, prices may rise but they can also fall. Capital gain only really exists if it is a realised capital gain, otherwise what goes up, can also come down.

    • Kevin Turner
      Posted at 16:38h, 09 March Reply

      Hi Kathy. Yes you are correct – a bit long but we appreciate your views and for sharing them. Regards. Kevin

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