Summary: Conventional advice is that "rent money is dead money" and getting on the property ladder is a reliable, long-term path to financial security. Supposedly, it forces you to save in something concrete which always goes up in value in the long run. Plus you get to borrow "other people's money" at the cheapest rate possible to make money, and exploit the most generous tax breaks available.
I have exposed a few of the most ubiquitous housing myths in detail on this blog. But there are literally dozens of myths and fallacious ideas about housing being a fantastic investment. In this post, I will list most of these claims and provide links that demonstrate they are either false or exaggerated.
Details:
1. Articles that deal with multiple myths about housing as an investment
Some of the best articles dealing with dozens of property ownership and investing arguments are:
> JL Collins - Why your house is a terrible investment
> Patrick.net - 37 Bogus Arguments About Housing
> Who Crashed The Economy? - House Asset Prices
> Bubblepedia.net.au - Archive of home page
2. Myth: Houses appreciate in value
A typical example:
Sydney homes are earning more than their owners — with the price of a house increasing by more money each day than most workers earn in a week.
Exclusive data obtained by The Saturday Telegraph reveals the market value of properties across the city has gone up at a rate of $222 per day — or one dollar every six and a half minutes — since the start of the housing boom in mid-2013.But buildings (houses or apartments) only depreciate in value just like cars. What does appreciate in price at around the long-term rate of inflation and income growth is land. More specifically: the ability to produce value from land (shelter, business, etc).
NSW real estate: Astounding price rises in Sydney housing rival professional wages
See:
> Investopedia - Top 4 Things That Determine a Home's Value
3. Myth: Land prices reliably go up based on supply and demand, and this is a good thing
The core of this argument is that "they're not making any more land" and if populations are growing then the supply of land will always lag demand and keep prices on an upwards trajectory.
But even if land prices were simply a function of supply and demand, there are many more complicating factors that make it a risky investment. In countries like Australia, the principal risk is that speculation leads to boom and bust cycles. The long cycles are where the real risk is - the busts can last decades.
Regardless, the truth is that land prices have a much more important and reciprocal relationship with the productivity (thus real wealth creation) of an economy. High land prices reflect large amounts of unearned income ("economic rent") that isn't being captured by government. Taxes burden productive labour and capital instead and the high land prices are a universal, unnecessary added cost and barrier to economic activity.
In the short to medium term a small proportion of the population can get lucky from land price speculation or passive boom-riding. In the long run everyone suffers and land prices deflate anyway.
See:
> Prosper Australia - Land prices are not simply a matter of supply and demand
4. Myth: Land prices always go up in the long run
Some people don't care if high land prices are good for most residents, as long as they are good for them. They only care whether land prices will continue to go up or not in the long run.
Thus, one oft-repeated lie is that property prices (more accurately: land prices) always go up in the long run.
But this is nonsense. Land (and thus house) prices do go down (or stay flat) in every country, often for decades. There have been large drops sustained over a decade in Australia before (1890's, 1930's, 1990's) and this will happen again as Australia is still operating in speculative boom-bust cycles.
Importantly, the media and property-boosters always quotes nominal prices not real (inflation-adjusted) prices. It's quite possible to end up with land prices that don't grow in real terms for decades and are unlikely to experience significant, sustained real growth in the foreseeable future. For example, Japan and Germany.
5. Myth: Australia's demographics are fundamentally different to Japan. It won't "turn Japanese"
Japan is entrenched with a falling population each year due to low birth rates and zero net immigration. Meanwhile, Australia has been running one of the highest net immigration rates in the developed world. As Australia appears to have plenty of space, population boosters think this trend will continue for decades.
However, Australia is actually the most urbanised country in the world and its high net immigration rate is facing increasing resistance as it creates added pressures on constrained infrastructure in its few destination cities.
The global headwind Australia can't escape is a rapidly ageing population. The working-age ratio is now peaking for almost all countries, including China which has propped up Australia's economy via demand for commodities.
See:
> Business Insider - This chart will scare anyone worried about the world 'turning Japanese'
TBC...
Further Info:
Domain
> Tokyo’s abandoned homes
COMMENTS