We spend a lot of our time assessing demographic and economic shifts and how they’ll likely impact house prices in the future. The birth of my son nine weeks ago has made it a whole lot more real. When I was his age in 1986, the average house price in Sydney was $98,000. Sydney’s average price in 2017 is around $1 million. That equates to a growth rate of 8% per annum between 1986 and 2017.
If we applied the same rate for the next thirty years, we’d end up with an average price of just under $10 million by 2047. I pointed out a couple of months ago that, given the impact of leverage, you don’t need a growth rate like this for property investment to be a strong tool of wealth creation. Here’s an example:
The typical savings account pays you around 3% interest per annum. You’re more of a risk taker and target an annual return on your investment of 10%. Let’s say you invested $100,000 as a deposit to buy a $500,000 property in Sydney in 2017. For you to make 10% per annum on your $100,000 investment for the next ten years, the average growth rate in Sydney would need to be only 3.5%, and that’s accounting for holding costs!
If there’s one financial lesson I will teach my son, it’ll be how to use leverage to create wealth. I smell the makings of a children’s book.