Tapestries-61 | Australian Property
Number go up? Asking different questions about a national religion.
When I read Australian newspapers from afar, and when I visit, I’m always struck by how much property dominates the cultural and economic conversation. It’s the closest thing we have to a national religion, and comes with religion’s tendency for dogma and evangelism.
When I read commentary about property in Australia, it’s generally designed to help the reader answer whether it’s more likely to go up or down, or help aspiring home-owners figure out whether it’s a good time to buy. The premises make sense, because it’s a critical question for the health of Australians’ balance sheets. But it’s not a particularly useful question. If we’re serious about considering whether prices will go up, shouldn’t we — after three decades of historic price growth — answer the question in reference to whether prices are high or low to begin with today, and proceed from there? You’d think so, but if you were to read Australia’s leading newspapers, you’d be forgiven for thinking you’re reading commentary about NFTs.
Being an Australian means having to form a view on the trajectory of the country’s real estate market. I’m not here to suggest there’s a market crash around the corner; it’s almost a structural impossibility given the deliberate policy decisions that have led us to this point. I’m just looking for sober, sensible and rational discussions on the topic to help me form a clearer view from afar. I haven’t found many, so this piece is my attempt at intelligently contributing to a conversation that occupies pride of place in our national discourse, and is the source of so much stress and striving for so many.
A qualifier before we begin
Before we get into the detail, I want to make an important qualifier. This piece may come across as having a pretty negative bias about Australia, but I want to be clear that my intention is not to whack our country. Quite the opposite. Australia is one of the most desirable places to live in the world, and for good reason. We are blessed with stable government and rule of law, a staggeringly high quality of life, fantastic healthcare, great education, abundant beauty, and most importantly, wonderful people. We’re not perfect, but life in Australia is as almost as good as it gets. Housing and affordability is also not an Australia-specific issue; I can attest from New York that rents and cost of living are getting to extreme levels, and I would suggest that global housing challenges will dominate the politics of the next 10 years to the same extent climate change will.
But it’s precisely because we enjoy such a high quality of life in Australia, and because it’s my home, that I want to pose a new set of questions. My contention is that the combination of crushingly high prices and a rudderless economy don’t make for a particularly rosy long-term picture, and that rational observers shouldn’t have to look too hard to agree. I don’t have the answers, and fully submit that my analysis may be incomplete or lacking in sophistication; I’m no property expert and I’m writing this from afar. But I am convinced we’re having short-sighted conversations about the asset that sits at the core of our country’s wealth, and that we’re doing so out of some misguided expectation that the future will look like the past. This piece is my contribution to that future-focused conversation, and I hope you read it that way. So with this qualifier and contention respectively in mind, let’s get going.
All thoughtful analysis starts with level-setting the facts and asking good questions, so that’s where we’ll start. We’ll begin by zooming out to answer the following questions:
How expensive is Australian property relative to Australian incomes, history, and comparable markets?
How healthy (or stressed) are the finances of Australian households?
How is the Australian economy performing?
Once we’ve answered these questions — in what hopefully reads as a relatively objective style — we’ll be in better position to state an opinion on whether we think the number will go up or down, and whether that’s even a good thing from here.
The facts
#1 How expensive is Australian property relative to Australian incomes, history, and comparable markets?
To answer whether prices will go up or down, we must begin by figuring out how high prices are today. There are likely many ways to do so, and I’ll keep it simple by comparing median Australian house prices, to median incomes, as this provides a useful snapshot of how affordable homes are based on how much income households generate.
The Urban Reform Institute and the Frontier Centre for Public Policy recently issued the 2023 edition of their housing affordability study. The report compares median income to median house prices for 94 major markets across 8 countries. The scale rates 3.0 and below “affordable”, 3.1-4.0 “moderately unaffordable”, 4.1-5.0 “seriously unaffordable”, and 5.1 and above as “severely unaffordable”. Australia as a country has a multiple of 8.2. Sydney is the 2nd least affordable city in the world in this study at 13.3, after Hong Kong. Melbourne is 9th at 9.9 (ahead of London and Miami), Adelaide is 14th at 8.2, and Brisbane is 17th at 7.4 (ahead of New York). Australia’s median income to house price ratio was 2.8 in 1987. This means that median house prices have grown three times more than income over the same period.
A recent PropTrack/REA report concluded that housing affordability is at its worst level in three decades. The following comment in the report jumped out at me: “Highlighting the alarming state of housing affordability at current interest rates, a household earning the median (or typical) income in Australia can now afford just 13% of homes sold across the country. This is the lowest share since records began in 1995.” Since 2000, Australian real estate has outperformed all other major markets, including Canada, the UK and the US.
The conclusion here is that Australian homes are amongst the most expensive in the world. The current price level is (a) extreme relative to Australians’ income, (b) extreme relative to income ratios globally, and (c) a function of an historic 20-year run of price appreciation. Let’s move on to question #2.
#2 How healthy (or stressed) are the finances of Australian households?
In #1 we looked at prices. In #2, let’s look at the financial health of Australian households. Understanding the state of household finances is critical to determining the market’s trajectory, as financially healthy prospective buyers are capable of pushing the market higher, and unhealthy prospective buyers (or existing owners) could see it go the other way.
Let’s start by looking at household debt, as debt levels can give a good indication of financial health or stress. Australian households have the 3rd highest level of household debt to net disposable income in the OECD, at 211%. Despite how much we would like to think it’s the nation of consumer debt, the US comes in at 18th (102%). Alongside debt, we should look at savings. Australian households built up large savings buffers through Covid-19, when the savings rate rose above 20%. However, Australians have been steadily eating into their savings since then, with the savings rate at 3.2% as of June 2023. Said another way, over the last few years our household debt has increased significantly, at the same time as we’re saving less and less.
Moving from the balance sheet to the income statement, let’s look at wages, and real wages in particular. The “real” part refers to incorporating the impact of inflation; wage growth in itself is useless if the cost of living is increasing faster than wages. Real wage growth was doing pretty well until Covid-19, but it’s pretty grim news from there. Inflation has hammered Australian wages’ purchasing power, and as a result, they’re back where they were in 2009. We’ve lost over a decade of hard-earned growth, all at a time when unemployment is at a 50-year low. When taking into account inflation, Australians over 55 are the only age bracket actually increasing their spending, which isn’t a great sign for consumption growth.
With all this in mind, the IMF recently ranked Australia 2nd behind Canada in terms of housing market risk, given (amongst several factors) the ratio of household income to indebtedness, and recent increases in house prices. It’s relatively clear from the data that Australian households could be in better shape. I don’t think this would come as a surprise to anyone in Australia today. This conclusion should be considered in the context of price levels we discussed in #1. Hold that thought for now though.
#3 How is the Australian economy performing?
The housing market exists within the broader Australian economic landscape. It’s therefore important to assess the health of the economy when talking about the trajectory of the housing market.
Australia registered slightly better than expected GDP growth in the latest quarter (June), but the numbers showed areas of weakness. While the economy is still growing at the headline level, it’s actually shrinking per person when you factor in population growth. This is referred to as a per capita recession. When we look at per capita GDP over that period, we’ve had four per capita recessions (2000, 2008 and 2019 and now 2022). There isn’t a direct link between GDP and house prices (as far as I know), but the growth of the economy has to be a relevant datapoint. Productivity growth is another important area to consider, and unfortunately, productivity growth is at its lowest level in 60 years. This is perhaps the area of greatest concern, as it undermines our ability to improve or maintain our standard of living.
That’s the short-term snapshot, and it’s also worth zooming out further to look at how the Australian economy has evolved over the years. Harvard releases an annual ranking of countries by complexity of their economy and products. Complexity isn’t of itself a prized virtue, but countries without much value-add (aka complexity) really just follow the flow of global economic cycles. Australia ranked 93rd in 2022, down from 60th in 1995. Australia ranks below Laos, Honduras and Malawi, and just above Pakistan, Namibia and Algeria. It’s not hard to understand why. Australian manufacturing’s share of GDP was just below 6% in 2022, down from almost 14% in in 1990. That’s a lower percentage than the Seychelles, Belize and Bhutan. The trends don’t look great, and are supported by export and ASX data that make the nature of our economy even clearer.
According to the latest DFAT data, Australia’s top 3 exports are Iron ore & concentrates, Coal and Natural gas. These 3 account for 53% of Australian exports. Over 50% of the market capitalization of the S&P/ASX 200 is banks and resources companies, with the top 15 companies comprising over 50% of the index. To borrow a common phrase, Australia’s economy remains a quarry and a farm. Case in point is steel. We extract more of its inputs (iron ore and coking coal) than any other country in the world, but only make 0.3% of the world’s steel; we ship the inputs to China and import the steel back home. While Australian tech is a growing and exciting industry, and one that hopefully continues to scale, it remains a small part of our economy, and "[a]t 3.8 per cent the technology sector's direct share of Australian GDP lags behind the likes of Canada (6.8 per cent), the UK (8.1 per cent) and the US (10.2 per cent).”
The summary? The Australian economy is performing better than some global peers at the headline level. But the long-term trends — including decreasing complexity and declining productivity growth — are headed in the wrong direction. More than that, our economy has barely evolved in the last few decades (despite a historic commodities boom).
That was a pretty dense section. To refresh, we’re trying to ask useful questions to help us more intelligently state where we think Australian real estate is headed. To summarize the answers in the questions above:
Australian house prices are extreme relative to Australians’ income, and are extreme on this measure relative to global and historical levels.
Australian households are struggling given high levels of debt, reduced savings, and a decline in real wages.
The Australian economy is doing ok for now at the headline level, but GDP growth per capita and productivity are heading in the wrong direction, and our economy remains extremely concentrated and relatively simple, posing a challenge to our future prosperity.
Now that we’ve got a baseline for where we are, we can jump into a more thoughtful discussion about where we’re headed.
The opinions
To this point, I’ve tried to be relatively factual and objective. From here, I’ll try to be more direct in stating my opinion.
A. Property prices don’t exist in a vacuum
Property prices — and all asset prices for that matter — must be viewed relative to something. When viewed relative to incomes, property prices are out of control in Australia. The populations’ ability to afford the homes around them seems like a pretty logical starting point for analyzing price levels, but this discussion barely registers a footnote in the evangelical Australian press. Australian households are struggling, and the economy is sputtering; there is nothing alarming about these facts in and of themselves, but when price levels are eye-wateringly high to begin with, one has to question whether there’s enough of a reason to believe that prices can push further into the stratosphere.
As a general rule, high asset prices can reduce future returns, as they decrease future yields, and arguably price in the most optimistic of future scenarios. Higher prices also imply the potential for greater falls if a fundamental change hits the market. Where could a fundamental change come from? One area is due to pure economic factors, but another area is a change in market participants’ psychology. My friend Ben Hunt at Epsilon Theory has written at length about the common knowledge game, which posits that markets and narratives are not driven by what the crowd believes, but are actually driven by what the “crowd believes that the crowd believes.” Today, I think you’d be hard-pressed to find rational investors who believe property is a sensible investment at current price and debt levels (which would explain the absence of institutional investors in the market), but the crowd still believes the crowd believes that investing in property makes for sensible investing. I don’t think we’re about to see a reversal in that sentiment, as I don’t think we’re setup for a crash, but I do believe a period of low price growth could unsettle the foundations of this belief system.
Critically, as house prices have gotten more and more expensive as the years have rolled on, one would expect the nature of the questions and analysis to change. Is now a good time to buy should have different answers in 1993, 2003, 2013 and 2023, but my experience over the years is that the answer is always the same: you just need to get into the market. That’s been sound advice to-date, but shouldn’t price and debt levels, and relative values and broader economic performance, impact the answer? My sense is it’s difficult for certain parts of the population to expect anything other than perpetual growth, because that’s been their experience for 30+ years (more on this in “E” below). In Australia, house prices do seem to exist in a vacuum, which makes for unproductive discussions about the market’s trajectory.
B. Historic levels of immigration can only push the market so far
The main reason people think property can continue to increase in value in-line with historical levels is population growth. When it comes to population growth, we are reliant on immigration because Australia’s fertility rate — like that of most developed nations — is below replacement rate. We are bringing a staggering number of people to our shores. In the last 12 months, our population grew by ~563,000, of which ~454,000 was through migration. We added a Canberra-sized group of people in 12 months, and we’re not slowing down.
I’m a proponent of a bigger Australia for personal and practical reasons (both my parents were born overseas and arrived in the 1980s). But we have to ask, where are all these people going to live? Our population is soaring, while we (a) struggle to build enough dwellings for the people already living here, (b) our construction industry rolls through a period of insolvencies and collapses, and (c) our government cuts back on infrastructure spend. You don’t need to be an economist to figure out why Australians are having fewer kids, you just need to ask your adult children, as there’s clearly an inverse relationship between the cost of housing and the size of families.
When you couple our anemic housing supply growth with a booming population, there’s a very strong case for rents and prices continuing to rise. It’s for this reason that it’s difficult to see prices falling over the next ~5 years. But we have to ask, where to from here? The things capable of organically pushing prices higher — like lower starting prices, higher real incomes and a robust economy — are all going in the wrong direction. That leaves the market reliant on inorganic, artificial measures, like historic levels of immigration, when our housing market is already trading at extreme price-levels. When you layer in regulatory-driven supply constraints, and a regressive tax regime that rewards speculators, it’s clear that the market is structured to create higher prices. But there’s a limit to how much growth we can generate through these structural distortions. No market in the world goes up forever, and I’d suggest we’re getting close to squeezing out all the juice our market has to offer.
C. The Australian property market is built on speculation
It’s important to qualify all this investment talk with the acknowledgment that not every person who buys an Australian home is an investor. In reality the majority of them are people looking for their own homes, and not all of them are looking for a return; many just want a place to live. But while housing markets are markets for homes, when you consider the structure of the Australian market, it’s an inescapable fact that it’s a speculator’s market. The accelerating price appreciation of the last 20 years, worsening affordability, tax benefits that support speculation, and the seemingly uneconomic investment cases used by investors, leave no room for a different conclusion. So while owner-occupiers remain in the majority, investors continue to grow their share of the market, meaning we have to interrogate the investment thesis underpinning investing in Australian real estate.
Looking back at the last 40 years, the majority of the appreciation in house values came after the Howard government made changes to the capital gains tax in 1999. “Prior to the CGT changes, the number of rental properties that produced a loss were roughly equal with those that made a profit. But as soon as the changes came in, rental losses became much more attractive,” and the trend has accelerated from there. In most places, real estate investors seek a return driven by generating attractive levels of rental income, but that’s not the case in Australia. In Australia, investors can offset investment losses on a specific asset against their aggregate income, and reduce their tax on sale at a time of their choosing. This has turned Australian property into a highly effective tax minimization scheme.
The main way Australian property investors generate a return is through an increase in prices, not rents, which is the textbook definition of speculation. Gross yields in Australian capital cities remain at 3-4%. That means investors can expect to receive 3-4% of the purchase price in rental income. Investors looking for loans for investment properties can now expect to pay 7% interest. The only reason a rational investor would make an investment in these conditions, is because (a) they can deduct the losses, (b) they can get a discount on capital gains if the property increases in value, and (c) they have a steadfast belief in property only ever increasing in value. But how much does it need to increase to make sense, what does it imply for affordability, and what if it doesn’t increase at sufficiently high rates? To again re-state my contention, I don’t think prices will (or can) plummet, but does our market make sense if prices goes sideways for a while, rather than continuing their upward march as they’ve done for decades? And while investors make up the minority (20-30%) of homeowners, what happens to prices if they collectively decide the investment case no longer makes as much sense? They’re more nuanced questions, and while I don’t have the answers, I haven’t seen them posed elsewhere.
D. It’s going to be harder to grow equity in our homes than it was in the past
Owner-occupiers and investors want the equity of their properties to increase so they can either trade-up to a bigger property, or buy more investment properties respectively. While not everyone is looking for a financial return on their home, at current prices I doubt the first home the average Australian is buying today is intended to be their long-term family home. We all need to find a way to trade-up, which we can do through building equity in our homes. And the easiest way to build equity is for the value of the home to increase.
Interest rates in Australia steadily declined from the 1990s onwards, until they effectively reached 0% in 2021. Declining interest rates increase asset prices, and this was one of main the drivers behind the growth in Australian house prices (low interest rates blew bubbles across the world and asset classes too, not just Australia). Critically, the majority of the increase in home prices flowed through to equity, because the cost of debt was so small, or at least decreasing over time. But today, mortgage rates are over 6%, with little prospect of them coming back to 2 or 3% given inflation and cost-of-living pressures. Higher mortgage rates are now a big hurdle that house prices have to overcome to once again meaningfully contribute to home-owners’ equity.
If you’re a new property investor, buying at 3-4% gross yields, with rates above 6%, your investment is obviously going to lose money in the short-term (and that’s before you think about maintenance, rates and other costs that depress returns even further). If you’re a new investor or owner-occupier, with a sizable mortgage, how much do prices need to appreciate for you to grow your equity? Let’s look at history to contextualize what we might expect. Per CoreLogic: “Nationally, dwelling values have increased 382% over the past 30 years, or in annual compounding terms, rising by 5.4% on average since July 1992.”
We’ve just been through the absolute Goldilocks era of Australian property growth, and the annual return is below 6% (obviously certain areas have grown more, and the rate fluctuates over that period, but that’s the average). 6% is now the cost of debt. For reasons described in the first section, I think growth will be at least below trend for the medium-term; interest rates have gone from highly supportive of rising prices, to a real challenge to prices and Australians’ balance sheets. I also think inflation and cost-of-living pressures mean that interest rates will need to remain at-or-near current levels for some time longer. As Australian households cut back on as much spending as possible to keep up with mortgage payments, the risk of recession rises. It’s not hard to see unemployment rising in this scenario, and I think unemployment — more than interest rates — presents the biggest risk to prices. People losing their jobs is not fun and not the answer to housing affordability issues… unless you’re Tim Gurner and you just want the lazy pricks to learn a lesson. He may have apologized, but he meant every word he said, and it was revealing to say the least.
But putting these risks to the side, even if prices continue to grow at the same levels they did in this historically-strong 30-year period, will home-owners actually grow their equity? Given the already sky-high prices, new cost of debt, and rising economic challenges, I think we should at least consider the possibility that perpetually increasing equity values should no longer be taken for granted. And if we can’t grow our equity at the same rates as we did in the past, we have to reconsider our investment cases in light of a new set of conditions.
E. We find it difficult to extract ourselves from the Australian property experience
I think it’s hard to have a sober conversation about Australian real estate for two reasons. The first is we don’t realize how culturally unique our obsession with property is. The second is that our leaders, political and otherwise, are of a generation (let’s assume they’re in their 60s) that’s lived through a period that’s been staggeringly supportive of ever-increasing prices. It’s therefore hard for them to imagine a future that looks different to their experience. I’ll cover both here briefly.
We have a unique obsession with property. Australians spend weekdays consuming the latest projections in The Australian or the AFR, and spend weekends either attending auctions or talking about them. Speaking of auctions, I’m pretty sure nowhere else in the world holds in-person, on-site auctions to the same degree, or the same way, Australia does (except perhaps New Zealand). The Saturday morning auction-coffee-auction ritual is as close to Australian church as one is likely to find, and without disrespecting Australian pastors and ministers, auctioneers now own the pulpit. The performative, dramatic and almost gladiatorial Australian auction is a staple of our real estate experience, so it’s worth calling out how unique it is.
The second reason it’s difficult relates to our leaders’ lived-experience. Consider briefly the experience of a young Australian beginning their real estate journey in the 1980s. Back then, the average income (I couldn’t find median) was ~$20,000 per year, and the median house price was generally below $100,000 in major cities, making housing affordable per the definitions above. Over the next 40 years, interest rates progressively fell from a high of 17% in the late 80s, to 0.10% in 2021 (which increased prices and made mortgages more affordable). Real estate prices also had the benefit of the Howard government’s highly accommodative tax changes in the 1990s. Australia’s population grew steadily over that period from ~16 million in the late 1980s, to almost ~26 million today. These factors aren’t unique to Australia, and post-WWII generations in developed countries around the world will have had similar experiences. But it’s hard to overstate how much these factors — organic and planned — contributed to a market conducive to higher prices.
Upton Sinclair’s observation is particular useful here: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Said another way, it can be difficult for this generation to view Australian property as anything but a perpetual winner given (a) their entire life experience, and (b) the fact that doing so is in direct opposition to the interests of their balance sheets.
F. The property bull case may also be Australia’s bear case
Let’s once again come back to price and affordability. At current price levels, someone on a median income can only afford 13% of houses in the country. Let’s say house prices continue increasing at 6% per year. It’s unlikely that wages will keep pace with 6%, and even if they did, we’d be living with even more painful inflation. That means that Australia’s housing would become even more unaffordable from its already extremely unaffordable levels. On the one hand, this may be good for property owners and investors as it would increase their wealth. But on the other, it means that home ownership gets further out of reach for generations of younger, aspiring Australians. Said another way, and maybe posed as a question, is it actually in our nation’s long-term (10+ years) interest for property prices to continue rising at historical levels, or is it only in the interests of an already wealthy, aging minority?
My evolving view is that our myopic focus on residential real estate is actually undermining our financial stability. Inflation remains too high in Australia, but the RBA is limited in its ability to raise rates given how leveraged Australian households are, and how quickly the impact of rates moves through the system. As a result, our interest rates are trailing those elsewhere in the developed world, and our currency is under pressure. If this trend continues, and the Australian dollar remains weak, we’ll end up importing even more inflation as we’ll have to continue buying goods from overseas (because we don’t make much anymore) with a weaker currency. We’ll then be faced with more inflation, even more indebted households, and our prosperity truly at risk:
“It is not clear that households and the political class have fully grasped the consequences of these forces and the speed at which they look to be building momentum. If the circular trap caused by the relationships between high interest rates, inflation and a weakening dollar continue for too long, it’s not too hard to imagine a scenario in which the economy ends up wrecked for a generation.”
The so-what of all this is therefore not just about property prices. The property market, and the speculation that has fueled it, now has a disproportionate and dangerous level of influence on critical fiscal and monetary policy decisions. Australian politicians and policymakers cannot afford to allow property prices to fall meaningfully, because that would completely undermine the nation’s wealth. To be clear, I’m not advocating for falling prices, but it’s disingenuous to suggest that supporting and protecting home prices doesn’t put other areas of our economy at risk, and the unpleasant truth is that it will be younger generations’ responsibility to ultimately foot the bill. It may not be a popular opinion, but I’m not sure that home prices continuing to increase at historical levels, from already extreme levels, is actually in the nation’s long-term interests.
Bringing it together
I didn’t set out to write a long piece, but it’s hard to tackle a topic like this without being relatively broad and comprehensive. I wanted to write this piece to help me clarify and articulate a range of ideas and questions I’ve had for some time, and to hopefully create what I hope is a more rational conversation about a topic of so much importance to our country and its citizens.
Australian real estate takes up a huge share of conversations in Australia. But more than that, it’s the source of significant stress for younger generations, either those that can’t afford to own or rent, or those that have been able to stretch (with or without help), and are now saddled with crushingly large mortgages. This was an important piece to write because to not acknowledge the structural precariousness of our housing market is intellectually dishonest. And to not acknowledge the structural and generational inequality is patently unfair. I don’t own any Australian property. I would like to, but whenever I extricate myself from the cultural black hole that is this asset class, I’m left with the inescapable conclusion that it’s an irrational market, trading on extreme FOMO at eye-watering prices. Any conversation about property that doesn’t start with an acknowledgement of price levels is not a serious conversation. Owning your home in your country’s capital cities should be achievable for large parts of a population, not a hereditary birthright only available to those with family help.
With the cost of housing where it is, and where it’s projected to go, young Australians are the biggest losers. But their loss is our loss, because a society where our youngest (a) can’t afford to live in capital cities, (b) are forced to spend a significant amount of their money and attention on housing, and (c) can’t afford to take any real career or financial risk, is a country with no future. Today the only young Australians capable of taking this type of risk are those with families supporting their housing needs. The productivity losses alone of pushing young people out of cities should give us pause, especially when we’re already seeing productivity growth slow. We are a country that has largely failed to innovate, with the banks and miners still dominating our economic landscape, and housing — an unproductive asset — our national religion. If we cannot create the conditions for young people to take risk, then we are undermining the prosperity at the core of our identity. We have to ask ourselves a very simple question: have we structured our economy to benefit the young or the old? In housing, and in other matters, I think the answer is clear.
I started this piece by asking whether the Australian housing market will continue to go up. I’ve laid out why I think the headwinds outweigh the tailwinds. But despite a long piece on the challenges the market faces, I believe prices will go up over the next few years, because increasing prices is deliberate a policy, evident in tax codes, immigration strategies, and supply restrictions. In the medium-term, inertia will prevail and no hard political conversations will be had to help us change course, partially because it’s political suicide, and partially because our politicians own a significant number of investment properties themselves. But as time goes on, I believe it will become more and more difficult for immigration, artificial supply constraints, and nonsensical tax benefits to sustain stratospheric prices. As I’ve stated throughout, it’s not just about prices going up, but about how much they go up in the context of today’s price and debt levels.
It’s hard to see prices going anywhere but up in the short-term (1-2 years), as demand so massively outweighs supply. However, if people start losing their jobs and unemployment rises (which feels distinctly possible given how everyone is cutting back on spending), we’re in a more painful situation. I think from there, prices go sideways for the medium-term (5 years), as rates remain higher-for-longer than people anticipate, and investors needs to figure out whether negative yields make sense. And in the long-term? I don’t know. Australia will remain the unbelievably attractive place it is to live, and Australians will always want to own property while the structural incentives to do so exist. I just don’t know if this party can go on forever. I’m not here to call the top, I’m just here to ask some more sensible questions, and I hope you’ve read this piece with that sentiment in mind.
The alternative is that my assessment of the market is just wrong. Perhaps price levels don’t really matter, and we can perpetually push prices above hurdle rates through enormous immigration, without crushing a younger generation and embedding inflation. Maybe I just don’t know what I’m talking about, and parts of this piece simply miss the mark. I’m very open to these possibilities, and that’s why I ask you (in all sincerity), what am I missing?
Thanks Daniel. Much to think about. There are definitely structural problems in Australia. There’s a need for Government initiatives in everything from encouraging baby boomers into downsizing to planning laws and migration focussed on building trades.
Renting too may become more common than it has in Australia.