Busting two popular myths about the Australian property market

Chris Bedingfield

Australian real estate is the quintessential “barbecue stopper”, especially if there are multi-generations attending. In a cost-of-living crisis the discussion has only been heating up.

But we believe that many of the reasons cited for Australia’s high property prices – and there is no denying the rapid escalation over recent years – are not necessarily true.

In a nutshell, this is an asset class that people desperately need an education on. While interest rates often drive the discussion around residential property prices, they are only one element – the cyclical element – of the cost of real estate.

The other element is the structural element, which means real estate prices itself around replacement costs over time. For example, if an office block costs $100 million to build today and in ten years’ time costs $200 million, office blocks in general will be priced around that $200 million mark, regardless of interest rate fluctuations in the meantime. Otherwise, there would be no reason for a developer to build any more office blocks ever again.

Myth 1: Population growth drives property prices

One of the most popular reasons cited for Australia’s residential housing crisis, or record high property performance, is population growth.

But by comparing Australia to a similar market, we can observe very different trends in property prices in the below charts.

Texas is the second largest state in the US and is a good comparison to Australia.  It has a comparable population to Australia – 20 million at the turn of the century. Both economies are supported by the resource and service sectors, both populations have increased by around 40 per cent over the past 23 years and most of that population growth is from external sources (immigration).

However, despite almost identical population sizes and growth profiles, the absolute value of house prices and rate of change is significantly higher in Australia, at 343 per cent since 2001compared to 196 per cent for Texas. We think this is conclusive evidence that population growth does not drive house prices. 

Myth 2: Capital gains tax policy has impacted property prices

On September 1999, the then-Howard government changed the capital gains tax law from allowing investors to index their cost base (to CPI), to effectively halve the capital gains rate for assets held for more than one year.

As the housing debate rages, many commentators point to this tax change as a core reason Australian residential prices have soared this century – yet we see no evidence it had any impact on assets that had a similar advantage to the changes – namely equities.

This tax change certainly has had advantages for Australians, and means the principal place of residence will be last tax free asset they have, but the chart above clearly busts the myth CGT changes altered the property market.

What’s really going on?

It seems like every investment manager has an opinion on property, whether that’s their area of expertise or not. Always be wary of people who are not experts in this field trying to scare you by talking up a housing bubble or a housing crash.

Unfortunately, we have made it extremely expensive to build in this country, with the cost of planning, government charges etc taking up close to 40c in the $1. As long as this remains the case, real estate prices are likely to remain high.

However, if you gear yourself carefully when buying property, and are patient, you’ll likely look back in 5- or 10-years’ time at a very solid investment.

By Chris Bedingfield, portfolio manager