Why property is no longer a safe bet

The drivers that delivered phenomenal gains in the Australian real estate market over recent decades can never be replicated.

According to my colleague Adam Carr, “buying property is, quite simply, a no-brainer” because “on any reasonable time frame, prices do only go up” (Why Gonski is wrong about house prices, September 9). In the current circumstances, it’d be tough to find a more bullish take on the property market short of seeking the views of a real estate agent or property developer.

But is it simply enough to look at past returns and declare property a safe bet? If anything, past performance provides the biggest red flag for property; there surely isn’t a better example of the old adage ‘past performance is no guarantee of future performance’.

It goes without saying that Australian property has been an amazing investment for a number of decades. If you purchased a property in the 1980s or 1990s there’s a good chance your mortgage is paid off and you’re sitting on a million dollar asset.

Some of those gains reflected savvy investment but, for the most part, the high returns to housing reflect a number of structural shifts and favourable government policies. There’s no reason to believe that these gains can be replicated by the generations that follow. 

The starting point was banking deregulation that began in the mid-1980s, which kicked off a credit binge that saw household credit rise from 45 per cent of nominal GDP in 1990 to 114 per cent in 2014. 

Graph for Why property is no longer a safe bet

This was supported by a range of demographic factors; the first ‘baby boomers’ hit 35 years of age in 1981 -- considered prime working age -- and income growth soared. But that paled in comparison to changing social norms; the labour force participation rate among women increased from 44 per cent in 1980 to almost 59 per cent in 2014.

The 1990s and 2000s poured fuel on an already raging fire. In 1999 the Howard government decided to halve the capital gains tax, which made property investment more desirable, and then they introduced the first home owner grant in 2000.

Finally, we shouldn’t forget that these structural shifts happened in the midst of 23 years of uninterrupted growth and a once-in-a-lifetime terms-of-trade boom. Could conditions have been more favourable for the housing sector?

Structurally the economy is once again shifting but this time the developments are not so favourable. An ageing population is weighing on both labour force participation and income growth; neither is being helped by the sharp decline in our terms-of-trade. The federal Treasury is predicting a sharp decline in per capita real GDP and income growth over the next decade.

Favourable housing policies -- such as negative gearing and the capital gains tax concession -- are well established and factored into house prices. These policies support elevated property prices but they are not a continuous source of growth.  

Credit growth has picked up recently but remains well below its level throughout the 1990s and early 2000s. Despite low interest rates, household debt has stagnated as a share of nominal GDP and credit growth of 20 per cent year-after-year no longer appears possible.

Whichever way you cut it the odds are stacked against the housing market. Replicating past gains -- particularly over the last quarter century -- is almost impossible. House prices may continue to rise but the gains will be a mere fraction of what investors have grown to expect in recent decades. On that basis, property may not be as appealing to investors as shares or bonds.

Despite what Carr implies property investment requires more rigour than simply looking at long-run housing graphs. To truly appreciate the Australian property market and assess its investment potential, we must dig below the surface and understand the structural and political factors that allowed house prices to grow so strongly in the first place.

In doing so we can only conclude that income and house price growth will be weaker than in previous generations. By virtue of being born at the right time, housing has been an amazing investment for the ‘baby boomers’ but the generations that followed have enjoyed no such luck.

Contrary to what Carr says analysts who are bearish on the housing market are not “doing themselves or their children a grave disservice”; instead they have simply realised that Australia’s economic boom is over and the housing market is no longer the safe bet it once was.  

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