Why Property Is A Long-Term Good Bet

Property is a diverse and ever-changing entity that seems to grow and decline without a great deal of consistency. Or so it would seem.

When analysing data, there are two distinct views one can take; the “long view” and the “short view”

The long view, as the name suggests, is taking a long term approach to the data at hand and looking for patterns, predictable metrics that can be reasonably calculated to occur at a given moment somewhere in the future. This scientific approach of data modelling is what allows for the most accurate of prediction.

Long term data is stable.

The short view, as you’d expect, is the opposite. It makes assertions based on slivers of information relative to what is currently affecting the market in a very esoteric and somewhat myopic timeframe.

Take the weather. We know the climate is warming, but certain sceptics claim that in some parts of the world the weather is actually cooler, which could be construed as the antithesis to the greenhouse effect.

Property is as dynamic as the weather and the factors that govern its growth and or decline can be based as much on Chaos Theory as the weather.

Looking at weather patterns, in all their tumultuous unpredictability is akin to looking at property growth or decline in the short term. Over months or years. The climate, where we can determine the steady rise in temperatures from ice core samples over millennia is like analysing the property market over decades and centuries.

The more data you’ve got to analyse, the more consistent the trends.

housing prices

Global property is not something that cannot be compared since different countries, possess different economic ideologies, population sizes and monetary values, but assessing each country as an individual property bubble can yield clues as to the nature of when the property market may boom or, bust.

In Australia, since about the time of Federation, property has increased at an annual compound rate of 10.4% roughly doubling in price every seven years.

Analysing these market over months or several years provides an unclear picture of the what the market is doing because the peaks and troughs of the economy has a natural knock-on effect to the price of land.

Looking at the bigger picture shows that there has been consistent growth, roughly doubling every seven years irrespective of government, climate, economic hardship or population. Supply and demand are a factor, particularly as national and international migration continues to flourish Australia’s capital cities, but this is turn is a double-edge sword because it increases market volatility.

Sydney currently has some of the most valuable real-estate in Australia. It’s spectacular harbour views and metropolitan vistas drive a high price for the smallest of apartments, but this property market rides like a roller coaster with extreme changes in the property of value (in the short term) that it can be unnerving for the investor.

That’s the short term view. Long term, property in Sydney is a sure thing, as is the case with Melbourne. Whilst the Melbourne market is less temperamental than Sydney, its title of the “World’s Most Liveable City” drives an influx of migration from interstate and overseas each year.

sydney property

Melbourne’s population is increasing by around 2% annually, or about 80,000 people based on the present population of 4 million.

This means that by the year 2050, Melbourne will have a population of about 6.5 million (if this growth rate remains consistent) or roughly a 61% increase from today’s figures.

The city is expanding and the groan of the main arterial roads, public transport network and metropolitan “living space” is obvious. Supply and demand is what drives the market price, and whilst Melbourne has the supply to meet the demand, this is not stopping the average cost of properties doubling every seven years.

Following the same logic, by the year 2050, a $500,000 apartment will be worth $2 million.

Thus, whilst Melbourne won’t quite have reached New York’s current population numbers, the cost of property may very well match the current real estate values in Manhattan.

manhattan property

Weathering the economic storms that rage around the markets of the Earth are also a short term disruptor of the stability of a cities property market since it has a direct impact on consumer spending habits and consumers’ willingness to part with their money in times of economic uncertainly.

Climate is also a factor. Whilst Australia’s capital cities are largely spared the might of nature’s fury, aside from the odd flash-flood or heat wave, natural disasters, like Hurricane Katrina, can send property prices plummeting. Indeed, there are vacant blocks of land in New Orleans, a few hundred metres squared in size, worth approximately $10,000 USD. That same sized block would fetch close to a million in the more affluent suburbs of Melbourne and Sydney.

But this observation leads to the obvious conclusion of socio-economic conditions of a given city. New Orleans is simply not in the same league as Melbourne or Sydney in terms of its population’s socio-economic standing and thus does not attract a significant amount of migration.

Over the last 100+ years in Australia, the six State and Territory capitals have established a fairly stable ranking relative to each other in terms of their median housing and apartment prices.

Sydney, with its picturesque vistas has always been the frontrunner in terms of the cost to purchase property, with Melbourne coming in second. Other cities, particularly in the northern states have seen a steady rise in the average property price as the oil and mining boom has drawn more and more people to that industry seeking a short-term financial gain.

This has led to other cities like Darwin, Brisbane and Perth experiencing growth in terms of property prices that has surpassed Melbourne and Sydney.

But Melbourne and Sydney are sure things. Blue chip. As solid as investing your shares in one of the big four. They have stable infrastructure, adequate transport, good schools and hospitals and a cultural drawcard that lures people in.

What is interesting is that Melbourne’s building industry cannot build more than about 140,000 accommodation units (houses and apartments) per annum due to shortages of qualified tradespeople of all types and shortage of suitably zoned land and the building permit process.

The Demand, on the other hand, is estimated at approximately 170,000 accommodation units per annum.  The math doesn’t stack up and as such we’re seeing the rise of multi-residential developments seeded by international investment growing out of Melbourne’s inner city streets at a rate not seen before. The Melbourne skyline has more cranes than skyscrapers.