What were incomes and houses in 1975?
Many investors think that when it comes to investing in Australia you can’t go past the old residential property market. Everything seems to be tilted in it’s favour. At the moment, with the interest rate cliff looming and talk from state governments to put restrictions on rental increases and increasing stamp duty, the market is in a state of flux. One thing everyone can agree on though, and that is there are not enough houses to accommodate our growing population. Should investors continue to invest in this asset class or are there better options elsewhere?
It helps if we take a look back to 1975 when interest rates were double digits and income was rising to accommodate inflation.
In 1975, the median employee earned $6448 per year. In the 47 years since then, wages have grown by about 5 per cent annually, taking median employee income to where it is today. The median Australian employee earned $65,000 in 2022, according to the Australian Bureau of Statistics. This figure captures both full-time workers and part-time workers.
So while earnings have gone up by almost tenfold since 1975, house prices have gone up by more than thirty fold in that same period of time.
Turn the clock forward to 2019 and according to CoreLogic the average price of houses were;
- Sydney: $866,524
- Melbourne: $709,092
- Brisbane: $533,133
- Adelaide: $465,266
- Perth: $458,137
- Canberra: $656,943
- Hobart: $484,716
- Darwin: $461,033
How very different is the world of 2023
According to the Australian Bureau of Statistics (ABS), Victoria saw a 73.92% increase in house values over ten years, with an annual percent change of 5.86% up to June 2022.
Australia has a well-known love affair with property and many Australians hold a firm belief that its value never goes down. However, not everyone has the minimum amount needed to place a deposit on a property and secure a mortgage. This has many people wondering if it makes more sense to invest in the sharemarket or dive into property? Despite the modern dynamics, this is an age-old debate.
Potential for growth
Both investments offer the potential to grow in value over time.
A 2015 research paper from the Federal Reserve of San Francisco titled The Rate of Return on Everything looked at nearly 150 years of data to uncover very long term returns across a range of asset classes and geographies. Australian housing returned 6.37% p.a. in real terms over the full sample of data, while equities returned 7.81% p.a. Looking at just the data since 1950, housing performed better, returning 8.29% p.a. vs 7.57% p.a. for equities. However, looking at just the more modern series since 1980, the pendulum swung back the other way with equities returning 8.78% p.a. vs 7.16% p.a. for housing.
Comparisons have their limitations, of course. Returns can vary according to the timeframe selected and you can break property down into different regions, or equities into various sectors. It’s important to keep in mind there have been periods of boom and bust for both asset classes. Returns change further once gearing and costs are introduced into the equation. Also, it’s important to keep in mind past performance is not indicative of future performance.
Regardless of how you cut the data though, it’s clear that both equities and property have produced attractive long-term returns.
The 10 lowest cost ETF’s in Australia
How can I get access to these low cost investment products?
You can access these low cost ETF’s via your self managed super fund with help from a licensed financial planner. Remember a tailored portfolio is best if you want to even out the volatility.
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