From RP Data this morning a timely research piece that not only debunks the idea of a housing bubble but one that should make all property investors think about the real return on their home or investment through time.
Real is the right term to use here because in an economic sense “real” means that the nominal return has been adjusted for the impact of inflation.
For example if the inflation rate in an economy is 3% and your property rose 4% then that’s a 1% “real” return even though most people think the real return is the observable 4% increase.
It’s an important distinction because while for the baby boomers, their parents and some generation X’ers property has been one of the best performing assets in nominal terms over the past two decades taking into account the impact of inflation changes the metrics materially – a fact that perhaps borrowers and Gen Y might cottoned onto recently if demand for debt is any guide.
RP data wrote:
According to the RP Data-Rismark Home Value Index, capital city home values were 0.7 per cent higher than their previous highs in September however, when you adjust for inflation, RP Data’s capital city index remains -6.5 per cent lower than the previous peak.
Here’s the chart of the “nominal growth in houses since the peak.
And here is the REAL chart – the one that really matters because it maps with the purchasing power of money in the economy (not to mention borrowing costs impact on the “actual” return).
Clearly if house prices haven’t even kept pace with inflation since the last peak then the chances of a bubble forming are reduced.
But to put this more starkly into context through time RP Data offers the chart below which shows the difference between the nominal and the “real” increase in housing since the boom began back in the mid 1990’s.
The orange line is the gap between perceived and actual increase in the value of housing against purchasing power in the economy. In fact this data suggests that the “real” return from hosuing could be almost half of what most people think it is.
As economic wonkish as this may seem it is fundamental to the perception of housing as a great investment destination and that belief is fundamental to what is an Australian fascination, or has been until the latest generation has entered the work force, of home ownership.
Real prices matter – even if nominal prices seem more real.