There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account. One of those "lost decades" just ended in 1999. The one starting around 1974 lasted almost 2 decades. The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc. It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line. How long until the Australian housing market follows?
You should view housing as a commodity. Like gold. It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there. There is no economic reason for a commodity to grow faster than inflation.
I think this is false, and the reason is:
"housing" is really just land. Think 50 years ahead, the building will be a hovel but the land will not have changed.
And land is not a commodity because it is not fully fungible. Particularly inner-ring land in Sydney, Melbourne, Hong Kong, London, New York, etc.
An ounce of gold in Manhattan is identical to an ounce of gold in a rural town.
An acre of land in Manhattan is a thousand times different to an acre of land in a rural town.
The graph quoted above is too broad, because it is for a whole country. There is no such thing as the median australian parcel of land, it has no address.
The economic reason for inner-ring land to grow faster than inflation is supply and demand. Australia's population is becoming more concentrated in its cities. Immigration is increasing and immigrants (moreso than locals) want to live in a major city. Australian jobs are becoming more concentrated in the city centre. Population is increasing at a greater rate in inner ring suburbs than outer ring suburbs. the ratio of house prices from inner ring to outer ring is increasing and the rate of increase is increasing. Inner ring land has higher growth than outer ring land, and that growth gap is increasing.
That is why the price of inner-ring land increases faster than inflation. Because the gap between supply and demand is greater than 2.5% per year. There is no prospect of demand waning any time in the medium term.
That said, I am still racist against real property as an investment.
Let's compare Sydney to New York City:
Sydney population in 1981: 3,204,696
Sydney population in 2010: 4,575,532
Sydney current population density: 980/sq mile
NYC population in 1980: 7,071,639
NYC population in 2013: 8,405,837
NYC current population density: 27,778.7/sq mile
NYC population growth, in terms of people added, was roughly the same during this time period, 1.3 million. With a much higher population density, I think it would be fair to say that land is at a much higher premium in NYC. How did the recent housing bubble affect NYC prices? Here's an inflation adjusted chart (red line):
And here is Sydney:
Source:
http://www.macrobusiness.com.au/2013/10/sqm-sydney-prices-to-the-moon/So the NYC housing market, and the Sydney housing market, both had about the same raw number of population growth, both boomed in 2000 (when all the housing markets were booming), but the NYC market already came back down, where the Sydney market just kept going. From 2000-now, NYC had a 1.4% inflation-adjusted return, while Sydney is enjoying a 3.6% inflation-adjusted return. NYC is currently sitting at 30% off it's inflation-adjusted high, while Sydney is still climbing at an increasing pace.
NYC has all the same population/land/density issues (more so), why didn't it keep rising? Why did the same housing boom give the Sydney housing market 2.5 times the return? Are we to believe that NYC had lower demand for housing during this period? Maybe NYC was an outlier, let's find another population/land/density area and see how they handle housing booms. How about Tokyo?
I'm reading "A Random Walk Down Wall Street", which has an interesting quote on this very issue:
"The bursting of the bubble destroyed the myth that Japan was different, and that it's housing prices would always rise. The financial laws of gravity know no geographic boundaries."I recommend against putting the majority of your net-worth into such a speculative asset. I strongly urge those intending to leverage into such an asset (mortgage) to first consider the consequences. I have many friends my age who say they, "signed my life away to a mortgage", and the bubble in Australia is much worse than it was here. Like all previous speculative bubbles, no matter the asset class, prices will fall in-line. Inflation-adjusted prices on commodities even-out over time. It happened in the NYC, it happened in Tokyo, and it will happen in Sydney.