Why property still rules the investment game

With indications that inflation is beginning to fight back, the Reserve Bank unsurprisingly left interest rates on hold this month. The sentiment suggests we may now be at the bottom of the rate cycle.

Based on the latest inflation data, the RBA’s December meeting is unlikely to yield the rate cut many mortgage holders have been hoping for.

One of the major reasons for the mild uptick in inflation is the cost of housing. Rents continue to rise steadily, as do house prices, further cementing a long-term trend in Australia which has become the most dependable investment truth.

A property bought on any given day in the past has always been worth more 10 years on.

Year-on-year, property has always demonstrated it’s the country’s leading investment asset class.

Yes, like all markets, there will be ebbs and flows. All markets periodically find a new footing but with property, investors have always had the comfort of knowing the clock is ticking. Viewed over a long enough timeline, residential property as an asset class has never dropped in value.

Obviously, individual exceptions exist. Boom or bust mining town investments come to mind. But the trend holds at a macro level.

Cotality’s November Housing Chart Pack shows the national property market has hit an unprecedented $12 trillion milestone, doubling in size over the past decade.

As an aside, Cotality research also shows Sydney’s median value is over $400,000 more than Melbourne and nearly $300,000 more than Brisbane. Sydney property continues to lead the nation pricewise.

The value of realty

There are some steadfast reasons for residential property’s enduring investment performance.

First, it’s essential. There will always be upward pressure on property prices because a residence is one of life’s necessities. It’s something we have to have. Whether we buy it or rent it, the need for us to purchase property is ever-present. We don’t have to buy shares.

This is the crux of the derivatives versus realty discussion. The value of a derivative investment like shares is derived from the underlying value of an asset. It’s not a direct reflection of what a buyer in competition is willing to pay for it.

The value of realty, on the other hand, is determined directly by buyers in competition.

Of course, the consistent and ongoing upward pressure on property prices is exacerbated when supply is low. This has been the case in recent years, following decades of governments failing to deal adequately with the issue, and it will be the case for the foreseeable future.

Time will tell if policy and investment efforts from the federal, state and local governments to trigger new housing supply will make the difference needed.

There are many hopeful buyers, renters and people in need of a secure place to live who are crossing their fingers, desperate for respite in the form of more housing choice. At best, it’s a long-term prospect.

But even if the most ambitious aims of the housing agenda at all levels of government are eventually achieved, even if the uppermost new supply targets are actually reached, will it arrest the house price trend that has been the norm since the 1900s?

History tells us the answer is no.