The Myth about Property Returns

Before I explain myself, I need to disclaim that I’m not negative on property as an investment. It has served me personally very well – buying a home 10 years ago, and for many of you that own property, I’m sure it has created wealth for you too.

HOWEVER, many people (clients and the public in general) have the opinion that property will never lose money or can’t go backwards. Many feel that investing in property (typically residential property) is their best and only means of fast tracking or living a comfortable retirement. It is these one-eyed opinions that make me concerned.
Record debt levels highlight just how enthusiastic we (Australians) are with property. This has plenty to do with the cost of debt being so cheap, but with property prices increasing, our love affair of property is strong.

Looking through why we are so positive on property, and in trying to compare property returns against other asset classes, I started learning more about the information that media channels use – to portray property in such a positive light. Common statistics like “property doubles every 10 years” has been thrown around at seminars to convince the public that leveraging yourself up with investment debt to buy property is a good thing.

So what statistics and measurement are the media and the property profession using when making historical return assumptions and comparisons? MEDIAN PRICES.
The definition of a median price is the middle price in a series of sales. Median price statistics are used to quantify valuation movements or property price increases of suburbs, cities and countries. And it is argued that this is a better measure than an average of prices, which are more influenced more by high and low prices.
So if we are judging the performance (capital return) of property over time using MEDIAN PRICES, then it assumes the individual property, suburb of properties, or city of properties has not changed character over that time. It assumes that no capital additions have been made. No renovations or extensions, no newly built homes, no landscaping, no roof re-tiling etc … you get the message.

Actually quantifying the amount of capital investment made for a suburb or city or country is near impossible, but theoretically, this capital should be taken into account when assessing property investment performance over time.

If you think about your own street or suburb you live in, and look at what property development activity has taken place over the last year, or even 5 or 10 years, it would add up to a fair amount of money. My own street has probably seen at least a third of all homes been renovated or knocked down and rebuilt just in the last 10 years. This capital obviously increases the Median Price of property, and therefore an increasing median price does not necessarily mean property returns are positive.

Start paying attention to the price statistics being used, and in now knowing how price changes are measured, caution should be exercised in assessing performance.
Positive median price movements aren’t as good as what they seem. Neutral or flat price movements details that capital returns are decreasing (as more and more renovations and re-builds will continue), and you should be concerned if Median prices are actually dropping.

Despite the myth that is the property return measurement, it is fair to say property has done very well over the years – thanks to falling interest rates, increased demand, immigration, foreign investment etc. Property comes with great tax benefits (tax exemption) for property that is lived in as your principal place of residence. But don’t make the mistake of relying on MEDIAN PRICES as an accurate gauge of property returns – as it is clearly not.