A lot of nonsense about projected property price growth | Michael Matusik

There really is a lot of nonsense written about projected property price growth these days.

The industry too often talks of percentage gains (or losses), rather than actual results i.e. actual growth or fall in dollar amounts.

Take, for example, recent price growth projections about select outer lying suburbs across several of our capital cities.

Two of these investment ‘hot spots’ were on the north-side of Brisbane & the one that caught my eye was Murrumba Downs.

Case study – Murrumba Downs

At present, Murrumba Downs has a median house price of $419,000 & it has been projected (on what basis one truly wonders – but that is a topic for another day) that prices are set grow by over 9% per annum over the next five years.

Hmmmm, let’s assume 10% per annum.

This means that within five years the median value in Murrumba Downs would be over $674,000 – an increase of $255,000 or over 60%. Or more simply put, up by $50,000 per annum (given compounding growth).

Over the last ten years, home values on average in Murrumba Downs increased by just 4.4% per annum.

Keep in mind – that was a time frame of unprecedented price growth across the Brisbane region.

And how often do Australian house prices show double digit percentage price growth?

Well, according to REIA figures, the answer is not that often. Over the past 30 years, just eight of them have enjoyed double digit price growth.  And it has only been during one period since the early 1980s, between 2001 & 2004, that double digit price growth lasted more than a year or two.

There must something seriously major going on just north of the Pine River for Murrumba Downs to beat all previous records.

A more accurate assessment

House price performance is more often than not shown as a percentage change on the previous year or quarter.  Our first chart shows how Australian house prices have changed by year since the early 1980s.

On average, prices – as a percentage change – have averaged about 5% per annum over the current cycle.

But when looking at price growth by actual annual dollar increases (or declines) you get a completely different & more accurate picture of what is happening with housing values across the country.  See chart 2.

A summary of our second chart shows that over the past 30 years, Australian house values have been increasing, on average, by $16,000 per annum.

The first chart shows, when taking the longer view, that home values have changed on average by 7.2% per annum over the last 30 years.

As one would expect, growth – measured as a percentage – is declining as values rise.

It is impossible for prices to keep on rising by the amount often spruiked.

The maths, as suggested in the Murrumba Downs example, just doesn’t stack up.

When we break down Australia’s housing performance into ten year segments, we find:

1984 -1994                8.2%pa                      $8,100 pa

1994-2004                 8.9%pa                      $20,300pa

2004-2014                 4.9%pa                      $20,400pa

The future?

Who knows what the next decade holds, but a very optimistic result might be average house price increases of around $20,000 per annum across the country, which in turn, would equate to around 3% growth each year.

Ignore the big calls on percentage price growth – they have hardly ever come true, and again, they are nearly impossible given today’s high prices.

Better still, challenge those who release these forecasts.

Ask why values would increase by over $50,000 per annum – as in the case for Murrumba Downs.

Also, challenge those media outlets that regurgitate this malarkey.

We believe that post this cycle (2008 to 2015) Australia’s market is likely to slow & maybe dramatically; with those buying ‘generic’ property in the hope of strong overall price growth likely to be disappointed.

We don’t envisage double digit percentage price growth (post 2015) in any market or for any Matusik Property Pick project either, for that matter, let alone in an outlying suburb which already struggles when it comes to housing affordability.