Can annual property growth persist at 7% perpetually?  

Over the past few decades, one of the most hotly debated topics has been housing affordability and the sustainability of annual property growth rates exceeding 7%, a trend that’s persisted for the past 45 years.  

This is an important discussion that deserves careful consideration from investors. Lately, I’ve received several questions about this topic over on our YouTube channel, prompting me to write about it more deeply and provide a thorough response. 

Remove the impact of inflation  

A podcast listener recently asked me how a $1 million inner-city terrace home in an investment-grade location could possibly be worth $8 million in 30 years. This question stemmed from my frequent statement that property tends to double in value every decade with an average growth rate of 7.2% p.a. 

The first point I made was that humans often struggle to grasp how numbers compound over long periods. Our brains are naturally wired to think in linear terms, but compounding is an exponential process. It’s also worth noting that our brains evolved to make quick decisions about small, immediate quantities, like food or threats, not to process large or abstract numbers. 

To make these projections more relatable, I recommend discounting future values into today’s dollars, using an online calculator or a spreadsheet. For example, if a property is projected to be worth $8 million in 30 years, adjusting for a 2.5% annual inflation rate, the present value of that property is roughly $3.8 million – which is more relatable already.  

If we factor in a 3% annual growth rate for household incomes (the Wage Price Index has historically grown at around 3% p.a.), the present value drops to just under $3.3 million. 

In other words, for this price appreciation to occur, there needs to be enough potential buyers whose property purchasing power can grow faster than 3% per year, enabling them to drive the property’s value higher over time. 

The top 20% of households earn half of all national income 

According to the ABS, in the 2022 financial year, the top 20% of income earners (the highest income quintile) received 47.8% of gross disposable income before tax and social assistance benefits.  

Additionally, the long-term income growth rate for those in the highest income quintile was 40% higher than for those in the second and third highest income quintiles. While the income growth for the lowest income quintile has been similar due to recent welfare increases, this group still has very limited spending power. 

Most people, when financially able, tend to gravitate toward locations that offer the greatest convenience, amenities, safety, and aesthetic appeal. These desirable locations are typically well-established, blue-chip suburbs. 

So, when we consider whether property can continue to grow at 7% annually in the future, we need to define the type of property in question. Can all properties achieve this? Likely not. However, properties in locations that are highly attractive to the highest income quintile, who also experience stronger income growth, are more likely to see this level of appreciation over the next few decades.   

Is Australian property overvalued? 

For over two decades, I have read countless reports arguing that Australian property is overvalued. But many of these conclusions rely on international comparisons that are often flawed. 

One of the key differences is how Australians are concentrated geographically. More than half the population lives in just 0.5% of the landmass – specifically, in Brisbane, Melbourne, and Sydney. And because Australia has fewer than two taxpayers per square kilometre (compared to France’s 60, for instance), we simply cannot afford the level of infrastructure investment needed to make regional areas as attractive as our capital cities. As such, suburbs situated within 2 to 20 kilometres from the CBDs of capital cities offer the greatest amenity and benefit from the highest demand. This trend is expected to intensify as our cities become more congested and spread out.   

Secondly, from an investor’s point of view, it’s not useful to think about “Australian property” as a whole. We need to narrow the focus to investment-grade locations. A mentor once told me that when he bought his home in Sydney, there were only 5,000 to 7,000 houses that fronted Sydney’s harbour. Back then, Sydney’s population was around 3 million. Today, it’s 5.5 million, but the number of harbourfront homes hasn’t changed. That’s scarcity! 

Properties in investment-grade locations typically sell for 1.5 to 3 times the median price for the broader city, and anecdotally, that price premium doesn’t feel unreasonable given the quality and scarcity of these areas. 

That’s not to say all property is fairly valued – some locations may well be overpriced. However, blue-chip locations offer unique, highly sought-after attributes that help underpin their long-term value. 

Expect strong capital inflows into property over the coming decade 

We know that when demand for an asset class increases and supply cannot keep pace, prices tend to rise. There are several tailwinds that could boost the amount of capital that will flow into property over the next decade: 

Lower interest rates 

Whilst the RBA didn’t cut rates yesterday, the markets is still pricing in 1% of rate cuts over the next year, which would see the cash rate fall to 2.85%. That’s a 1.5% drop from the peak, which is estimated to increase borrowing capacity by around 15%. Lower rates almost always translate into higher property prices over time. 

$3 million super tax on unrealised gains 

The Grattan Institute estimates that around 80,000 Australians will be impacted by the proposed Section 296 tax, which applies to unrealised gains for super balances exceeding $3 million. About 85% of these people are over 60 and can withdraw the excess from super, either via in-specie transfer of the assets, or by selling investments and withdrawing cash. As such, I expect that a portion of this capital is likely to flow into the property market. 

The inheritance tsunami 

Roughly $10 billion is inherited each month in Australia. This is part of a $3.5 trillion wealth transfer expected by 2050. In my experience, people tend to be sensible with inherited monies, often investing it, upgrade their homes, or passing it onto grandchildren to use as a housing deposit. While some inherited wealth is already invested in property, I expect more will be directed towards it in the future. 

Employee share windfalls 

Over the past decade, we have seen a noticeable increase in clients receiving substantial (sometime life-changing) wealth through employee share schemes. This can consist of sign-on bonuses, long and short-term incentive plans, or discounted purchase plans. This trend is especially strong among those working for US-based tech firms. These windfalls often translate into improved borrowing power for investment purposes and stronger property purchasing capacity. 

Lower future equity returns 

The S&P 500 has returned over 14% p.a. over the past 13 years. But history tells us that above-average returns are usually followed by below-average periods. Evidence-based share market models suggest US equity returns will be well below average over the next decade. If this plays out, more investors will look to alternative asset classes, including property, in search of stronger risk-adjusted returns. 

First home buyer incentives 

The federal government has removed the cap on the number of places available under the First Home Guarantee scheme. This will certainly increase the number of first home buyers, particularly in the sub-$1 million price range (or sub-$1.5 million in Sydney), adding more competition at the entry level. 

Don’t the wealthy only want large family homes?  

Why would someone in the wealthiest 20% of Australians buy a two-bedroom cottage on 200 sqm of land?  

It’s important to recognise that a 20 or 30-year-old typically does not have the same financial capacity as a 50-year-old. They are buying different types of property at very different price points – horses for courses.  

Even within the top income quintile, younger buyers in their late 20s or early 30s are usually only able to afford an entry-level, investment-grade property as their first step. But their financial capacity is still significantly stronger than the average Australian, for all the reasons outlined above. 

Also, these older dwellings will continue to benefit from renovations and extensions to meet buyer expectations. Ultimately, it’s the land itself that holds the most value, not the improvements made to it. 

Can I expect 7% annualised growth over the next 30 years? 

The short answer is maybe. You have the highest probability of achieving this benchmark if the property is located in an area that appeals to the wealthiest 20% of Australians, either as a home or an investment.