Key takeaways
Over the past two decades, median house price growth has been 5.3% p.a., which is considerably lower than the preceding 20-year period from 1983 to 2003, during which median house price growth was 8.7% p.a.
The median house price annual growth rates across five capital cities over the past 20 years have differed significantly from the preceding 20-year period. Inflation accounts for some of the difference, but there are also other factors to consider.
The property market's slower growth rate can be attributed to the recent global pandemic and the floating of the Australian dollar, but the preceding two-decade period also faced its own set of distinctive challenges.
Borrowing capacity changed a lot since the early 1980s, with lenders approving borrowers for amounts up to 10 times their income in the early to mid-2000s. Since the GFC, borrowing capacity has experienced a decline, with the average mortgage standing at 6.5 times annual average earnings. The past 20 years have seen property prices rise, but borrowing capacity may not contribute positively, which is the most significant factor contributing to lower growth.
In a rising market, all properties tend to appreciate, but it's unrealistic to expect the property market to surge as rapidly as it did between the 1980s and the early 2000s.
A long-term growth rate was applied to the median property value for each quarter since 1980 to determine the value that the median house prices should be today. The analysis indicates that Melbourne and Perth are the most attractive markets to invest in.
Investors might consider targeting properties with potential for future development, such as replacing the existing dwelling with a new family home or constructing multiple dwellings like townhouses or units.
Over the past two decades, the average growth in the median house price across the top five capital cities has been 5.3% p.a.
This rate is considerably lower than the preceding 20-year period from 1983 to 2003, during which median house prices grew by 8.7% p.a.
This significant difference in growth rates has substantial implications for investors.
To illustrate, a property experiencing a 5.3% p.a. return over 20 years would see its value increase to 2.8 times its original value, whereas a property with an 8.7% p.a. return would be worth 5.3 times its original value.
The key question arises: which period is more indicative of future returns?
Should the relatively lower growth of the past 20 years be considered a more reliable indicator of future returns?
If so, what strategic actions should property investors consider undertaking?
Comparing the numbers
The table below outlines the median house price annual growth rates across five capital cities over the past 20 years compared to the preceding 20-year period.
The difference between the growth rates in these two-decade periods is striking, particularly in Melbourne and Sydney.
Inflation accounts for some of the difference
According to the RBA, inflation (CPI) averaged 4.1% p.a. over the two decades ending in 2003, compared to 2.7% p.a. over the most recent two-decade period.
Consequently, roughly 1.3% p.a. or 40% of the growth cap identified above can be attributed to the variance in general inflation.
This leaves a discrepancy of 2% p.a., which has been influenced by other factors, which I discuss below.
GFC and pandemics
Over the past 20 years, economic and market conditions have been quite turbulent.
Starting with the Global Financial Crisis in 2008, there was significant upheaval, particularly in the financial sector, and it took nearly 9 years to fully recover.
Following closely on its heels, we’ve been grappling with the ongoing effects of the recent global pandemic, which has further impacted our financial landscape.
It’s tempting to attribute the lower property price growth to these two major events.
However, the preceding two-decade period also faced its own set of distinctive challenges.
It commenced with the floating of the Australian dollar in 1983, followed by the introduction of Capital Gains Tax in 1985.
The Australian stock market crashed by approximately 45% on Black Monday in 1987.
Additionally, the introduction of the GST by the Australian government in 2000 added further complexity.
Whilst most multi-decade periods include several one-off events that contribute to uncertainty, the most recent period (2004 to 2024) did include two significant global events that likely contributed to the property market’s slower growth rate.
Borrowing capacity changed a lot
Arguably, one of the most notable changes since the early 1980s has been in borrowing capacity.
This increase stemmed from the deregulation of the banking sector that commenced in the 1980s and the emergence of mortgage managers like Aussie Home Loans in the early 1990s.
These mortgage managers introduced much-needed competition against the Big 4 banks.
In the early 1980s, homeowners typically borrowed around 2.2 times the average income.
However, by the early to mid-2000s, it wasn’t uncommon for lenders to approve borrowers for amounts up to 10 times their income.
Subsequently, borrowing capacity has experienced a decline, influenced by events such as the GFC, the Banking Royal Commission, and stricter borrowing regulations imposed by regulators beginning in 2014.
- Also read:Melbourne property market forecast for 2025
- Also read:Brisbane’s property market forecast for 2025
- Also read:Latest property price forecasts for 2025 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Sydney property market forecast for 2025
- Also read:The 8 Best Property Investment Strategies in Australia
For example, low-documentation loans almost disappeared post-GFC.
Presently, the average mortgage stands at approximately 6.5 times annual average earnings.
It’s worth noting that there are more two-income households today compared to the early 1980s.
Nonetheless, the significant increase in borrowing capacity during the 1990s and early 2000s has undoubtedly contributed significantly to the escalation in property prices.
Are the past 20 years more indicative of future returns?
While there are several positive factors expected to drive property prices higher over the long term, such as population growth and a shortage of dwellings, it’s wise to acknowledge that borrowing capacity may not contribute positively.
In fact, the decline in borrowing capacity began approximately 15 years ago, which, in my view, has been the most significant factor contributing to the 2% p.a. lower growth mentioned earlier.
In a rising market, all properties tend to appreciate no matter their quality.
However, it’s unrealistic to expect the property market to surge as rapidly as it did between the 1980s and the early 2000s.
Looking ahead, I would advise investors to adopt a conservative approach and anticipate that the median house price will appreciate by around 2.5% p.a. plus inflation.
Of course, by adhering to evidence-based property investing principles, as discussed in my blogs, investors aiming for superior returns should focus on investing in investment-grade properties with the aim of outperforming the median.
What should investors do?
Given the potential for slower growth in the overall property market over the coming decades, it becomes increasingly crucial for property investors to adopt a proactive strategy to maximise their investment returns.
Be more conscious of property cycles
It’s essential for investors to be mindful of property cycles and carefully choose markets that are poised to deliver satisfactory returns, especially in the early years of ownership.
The table below highlights which capital cities are potentially intrinsically undervalued.
In this analysis, I utilised the long-term growth rate (i.e., since 1980, 43 years) and applied it to the median property value for each quarter since 1980 to calculate the value that the median house prices should be today.
I then calculated the average of these projected current values and compared them to the actual median house prices.
This methodology aims to smooth out long-term growth trends to determine today’s intrinsic median value, assuming prices will eventually revert to the mean, as they typically do.
This analysis indicates that Melbourne and Perth are the most attractive markets to invest in and are therefore most likely to deliver good investment returns over the next 10+ years.
Alternate uses or scope to add value
Investors might consider targeting properties that offer opportunities to add value, thereby enhancing investment returns.
For instance, you could look for a property with substantial land value, featuring a basic dwelling but in rentable condition, yet not currently optimised for its highest potential use.
It’s crucial to ensure the property has potential for future development, such as replacing the existing dwelling with a new family home or constructing multiple dwellings like townhouses or units.
While redevelopment isn’t the primary objective, it serves as a backup plan (plan B) in case market performance falls short of expectations.
The party may not be over, but it’s wise to plan for it
The economic fundamentals supporting the property market are incredibly strong, suggesting that the remarkable growth witnessed in the preceding two decades (1983-2003) could potentially repeat itself.
However, we believe it’s wiser to err on the side of caution and not bank solely on this possibility.
Therefore, by focusing on properties that offer opportunities to add value and manufacture growth, you can partially offset the risk of reduced market-wide growth negatively impacting your investments.
