That's a red rag to a bull @Chagsy (or is it a bear in this case?) ;)
I think there's some truth to the usual factors that are used to explain the rise and rise of property (and Australia needs to be called out as in a class of its own), but to my mind they all miss the most fundamental driver.
It's the money! There's just more of it, especially relative to the supply of housing stock.
How is there more money? Banks have created loads and loads of it by issuing loans (which goes in the pocket of vendors when a house is purchased, and then often recycled and leveraged further when they buy a new house). Add to this the fresh capital that is coming in from overseas.
How have banks created so much money without breaching capital adequacy ratios? Because the value (or should I say price?) of what they are lending against is also increasing -- it's a positive feedback loop that goes like this:
Increasing house prices > increased equity > increased borrowing/lending capacity > increasing house prices
Add to that the rise of dual income households, relaxed lending standards, generous government support, poor planning and decades of structurally declining interest rates.. All of which adds to the belief that "house prices always go up" and that it's the safest and most prudent form of wealth creation, which emboldens people to devote ever larger amounts of their income to debt servicing, plus adds a not-insignificant amount of FOMO.
The trouble is, what value is genuinely being created?
Fractional reserve banking can be a wonderful thing, but really only when used to fund the creation and development of productive assets. My contention is that no real value is being created when all the new money is being ploughed into residential property.
Sure, like any ponzi (and I use that term very deliberately), if you get in early enough you'll probably do well. That's what happened to the baby boomer generation: Imagine paying 4x a single average income for a house, and enjoying leveraged gains as that multiple more or less tripled over the last few decades! And that's a multiple of larger and larger real household incomes as dual income families became the norm.
But even then, the value is really only captured when you downsize, otherwise you are selling one overly inflated asset to buy another overly inflated asset. ie.Your nominal paper worth has increased, but try spending it without downsizing or using it to secure even more debt.
The real value was much more in having an affordable shelter to live in and raise a family.. you know, what a house is actually for! Even with much higher borrowing rates, the ability to service and pay down the loan was substantially easier a couple decades ago, so that generation had extremely low housing expenses when you amortise all costs over the total period of ownership.
And I'm not having a go at the boomers -- we all play the cards we are dealt. But that opportunity is largely gone. Trees, as they say, can't grow to the sky.
For buyers today, the very real value of having a shelter is still there, but they've had to commit to working a LOT more to afford it. And yes, in time, there may still be value to be captured when people are ready/able to downsize, but for this to be material in real terms we need to see new people entering the system that are prepared to dedicate ever increasing amounts of their income to housing.
But at a point you hit a mathematical limit. After all essential costs like food, health etc there's only so much income you have to dedicate to debt servicing. I have no idea when that point is -- in 2002 new home owners were committing 20% of their disposable household income to service a mortgage, today it's closer to 45% (and again that's a larger overall household income with both partners working). Maybe it gets to 60%? No idea, but there IS a ceiling beyond which you hit very real affordability constraints.
Imagine buying the median house in Sydney to live in 5 years ago for $1m. And borrowing $800k to do so. You could probably sell it for $1.4m today -- a $400k gain! In fact, because you only put $200k down, it's a 200% return on your equity!! (to be fair, finance costs, agent fees, stamp duty etc need to be included, but whatever -- it's still a good result!).
Ok, so how do you enjoy the fruits of your gains? You could sell your house and live in a unit. Or you could move to the country. Other than that, your only option is to draw down more debt. In other words, there's no benefit to be had without compromising on size, location or debt load. You can't have your cake and eat it too!
You could stay, of course, and just get the benefit of having the security of a shelter. And, again, this is a very real benefit and the entire raison d'etat of owning a home. But it'll cost you over $1200 per week for 25 years (at current rates) -- substantially more, even in real terms, than what people paid in the past. And for you to get a real, inflation & risk adjusted gain over the period, you kinda need the preparedness of others to dedicate even more of their economic output to housing in the future -- otherwise it's more about wealth preservation than growing wealth (and there's nothing wrong with that btw -- historically, that's what housing does; preserve wealth). And maybe that happens. But my point is that you hit a ceiling at some point, and at that point you can't expect any wealth creation. Everyone feels richer, and your asset has a higher price tag, but it's not a real wealth that can be spent on other things. Not without compromise.
An investment property is a little different. You can sell and realise the value of any gain, and thanks to leverage you don't need a huge amount of price rises to do really well. But what do you think the average person does when they see their equity grow on their investment property? They use it to buy another property! (and banks create the money needed to do so).
Again, the price tag of your assets and the nominal value of your wealth goes up, but so too does the debt burden and other carrying costs -- in fact, for many it's at a point where any income stream generated doesn't even cover these carrying costs. So EVERYTHING depends on sufficient and real (inflation adjusted) capital gains. It's a giant game of chicken. Maybe the party rocks on for a while and you manage to sell out and lock in the gains. Great! But if not, you'll soon learn that leverage cuts both ways and everything can unwind very quickly.. And even if everything goes sideways, on a net basis (after ALL costs) you are still slowly bleeding out.
The person who has a portfolio of 12 investment properties "worth" $10m might feel super rich, but unless they had significant wealth to begin with, or got in early enough, the chances are they also have a mountain of debt and are cash flow negative. If the leverage is high enough, it wouldn't take much to wipe any equity out -- poof! gone! And until then, the "wealth" is entirely illusory, unless they sell out.
Anyway, I know I'm in the minority here. And for what it's worth we are right now looking for a house to buy -- but not because I think it'll build any real wealth, but rather because I want some security and am at a point where i'll just suck up the ridiculous carrying costs. My calculus isnt "will prices go up or down from here?", instead it's "can we afford this without putting ourselves in a highly precarious position?".
Sadly, unless we want to live in a very small and basic house miles away from our network of family and friends, it doesn't seem possible at this stage. Hopefully my portfolio of shares (and, yes, bitcoin) helps to change that soon enough!
Next week we're holding a meeting with property guru Pete Wargent -- so I am genuinely interested in putting a balanced view out there for members, and maybe he can change my mind!
