Residential property investment is something which is near and dear to all Australian’s hearts and something we all think we know something about.  Almost everyone you meet wants to buy an investment property. 

They will tell you it’s because ‘it’s safe’ or ‘you can’t beat bricks and mortar’ or because ‘property never goes down in value’ or ‘the rent will pay it off’ or some other cliché. 

There are any number of people out there who will tell you how much money they have made in buying and selling property. In the good times you will hear from people who say the ‘own’ a dozen or 20 or 30 properties. Property developers will sprout returns from the rooftops how you can become an owner of one of their magnificent properties for the price of a cup of coffee a day. They will tell you that you can get into a property without a deposit and how within a few short years you will have a whole portfolio of properties and be able to retire.

If only it was that simple.

If statistics were available undoubtedly they would point to residential property underperforming the available alternatives and being for most people one of the worst investments they make. 

Property returns come in two parts, income and growth. Income is the rent that you receive and growth is the increase in the value of the property over time. 

Gross rents are measurable and there are plenty of statistics available. What is not so readily available is statistics on nett rent.  When buying a property most people will look at the gross rent, that is what the tenant pays and ignore the outgoings. What is important is the yield on a property after all the expenses of the property such as rates, insurances, body corporate fees and maintenance. Because this is what is left over for you and is the real return on your investment.  If you have a mortgage, it’s what you will have left with which to repay that mortgage.

Growth is the hard one.  There is very little by way of hard statistics on the growth in house prices. The Australian Bureau of Statistics keeps data of established house prices but that is useless to a buyer.  But equally as useless is the rubbish put out by the various residential property groups and associations.  This data is used by them to indicate price movements by looking at recent sales. It has no relevance to individual property values and is often grossly misleading. 

Regularly the newspapers publish list of top performing suburbs with huge gains recorded which infer that houses in those suburbs have risen by the stated percentage.  This is distortion of the truth. In almost every case, when investigated it turns out there are new development areas within the suburb with homes being built (and subsequently sold) at higher prices than the remainder of the suburb. This obviously exaggerates any increase in median house pricing and is grossly misleading. The use of these rubbery statistics does no credit to the real estate industry and anyone who buys a property based on these has got rocks in their head.

Growth can only be measured over time.  Like all commodities, prices are affected by supply and demand and prices during boom times will rise much faster than normal.  This never lasts. Equilibrium is always restored. 

But what about the long term?  Is it true that house prices double every 7 to 10 years?

According to Nigel Stapledon of the University of NSW School of Economics in his paper, “Long Term Housing Prices in Australia and Some Economic Perspectives”, in 1950, the median house price in Sydney in 2005 dollar terms was $102,530 and in Melbourne it was $91,230. By 2005, the median prices had risen to $453,000 and $314,200 respectively.

If the theory that house prices double every seven years holds true, that would mean that the median Sydney price after those 55 years would have been $19,384,234. If they doubled every 10 years than the value would still have been $4,694,228.  In Melbourne the figures are $4,176,869 and $17,247,866.

In some circumstances, residential property can be a good investment.  For the majority however it is a good way of losing money slowly.

What do you think?