Analyzing historical house prices between 1960 – 2006 reveals interesting long term trends
As part of my general research on Australian property I have been looking for charts showing long term price trends, probably like most other property investors. Unfortunately, I have not been able to find these kinds of charts other than the typical 10 or maybe 20 year trend - but that is not really the long term horizon I want. I want more something showing historical house prices over the last 50 years and I don’t want to pay for the data.
With some persistence I have found two datasets over different time periods, being:
- Median Australian house prices from 1986 to 2006 from REIA as quoted in Michael Yardney’s book “How to build a multi-million dollar property portfolio in your spare time”
- Median Melbourne house prices from 1960 to 1986 from BIS Shrapnel as quoted in Jan Somer’s book “Building Wealth through Investment Property”.
Even though these datasets are different in that the REIA data are median house prices for the whole of Australia and the BIS Shrapnel data is median price data for just Melbourne, I believe that they provide a representive overview when combined as long as you are looking for long term trends. In fact, median house price data is quite unreliable other than for general, longer term trends anyway.
The first chart below, showing historical house prices between 1960 and 2006, is therefore based on the above datasets with the BIS Shrapnel data running from 1960 to 1985 and the REIA data from 1986 to 2006. It clearly shows strong exponential growth, but with periods of limited growth where the curve remains relatively flat.
If you look closely at the supporting data you can see that from a median house price of $8,300 in 1960 it took some 12 years for the median house price to double by mid 1972, but then from mid 1972 to mid 1975 the prices doubled again – just three years. Below, I have summarized the doubling periods taking 1960 as the basis:
1960 – 1972 = 12 years to double
1972 – 1975 = 3 years to double
1975 – 1983 = 8 years to double
1983 – 1988 = 5 years to double
1988 – 2001 = 13 years to double
Interestingly enough most property experts state that Australian residential property values double in 7-12 years with the long term average indicating a doubling in values every 7 years, which suggests an annual growth just over 10%. Now the dataset I have used here is not internally consistent so I have to be careful with drawing conclusions, but to me the data does suggest that the typical doubling period is much more erratic than the established property experts would have us believe. And the averaged annual growth between 1960 to 2006 was 8.7% rather than in excess of 10% annual growth.
You can also see from this that the value of timing the market can be significant – if you can get it right.
Problem is, that most of us can’t call the exact top or bottom of a cycle let alone predicting whether the doubling will be in 3, 5, 8 or maybe even 12 years. So, I personally don’t try to “time the market” and in stead rely on “time in the market”. Not very glamorous and certainly not a get rich scheme, but it is a sure way to build wealth. Hopefully significant wealth.
I am still looking to find a single consistent dataset from 1960 or earlier and will then update this page. In the process I have found house price data for Brisbane from 1970 onwards and developed a similar set of graphs, but with limited commentary.
When you redraw the historical house price chart using a logarithmic scale on the vertical axis you get the chart shown below. It uses the same data, but by plotting it this way you can more easily determine how annual growth has varied over the years. If annual growth had been constant over the years, the graph would be a perfect straight line, like the dashed trend line. Instead, you can see certain periods where growth lagged, typically followed by a few years of accelerated growth - the property cycles we all know about.
Now the graph above can be a bit misleading in that it suggest a very stable growth pattern, but when you annualize the median house price data more carefully and calculate annual price increases you see that there are years of extreme, moderate, low and sometimes even negative growth.
Even though there are cycles within the property market, the annual growth chart above shows that it can be difficult to predict annual growth from year to year. That is why I strongly believe in the age old mantra “time in the market” rather than trying to “time the market”
So we have looked on house prices since 1960, let’s have a look at what the future may hold. Now unlike others I don’t pretend to know what the future holds and I don’t have the ability to develop complex house price models – not that I would want to if I could. Let’s just try a simple approach and add a trend line to the 1960-2006 data and see what that might tell us.
For this I have use the logarithmic chart as it is easier to fit a trend line to and the result is captured in the house price chart below.
Be careful – this is not a prediction!
The chart is simply showing what median house prices could look like in 2020 or 2030 IF growth continues along the same lines as it has for the last 50 years.
Personally I believe that growth will continue along very similar lines with a few buts. First of all, we will face a couple of slow years between 2010-2012 and possibly but then the growth cycle is likely to pick up and the long term trend will be maintained.
Secondly, housing affordability is a concern, but I don’t believe this will drive prices down, instead we will see smaller properties becoming the norm with a significant increase of high and medium density properties along the outskirts of all major cities. The consequence will be that over the long term the median house price will slow in growth because the median house is becoming ‘smaller’.
Could I be wrong?
Of course I will be wrong and things will work out differently for all kinds of reasons.
But I am convinced that the long term growth in property will persist and that demographics will slowly but surely change the face of the Australian suburb – and more than many will believe possible.