Latest / Money Grows on Trees / #245 - Why property prices are outperforming wages in Australia

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#245 - Why property prices are outperforming wages in Australia · Money Grows on Trees

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  The policies being made in this country are not supportive of young
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  people, next generation. It's a God, it's a disgrace. It's disgusting. If
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  you've ever studied any level of macroeconomics, this is an
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  absolute fact. It's physics. It's mathematical. When rates go
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  up and by rates, I mean the interest rate at the reserve bank, when
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  it goes up, the value of assets falls. because
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  I was listening to a survival expert recently. I forget what show it was on
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  on YouTube. And they actually had this question. They said, what are the three most
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  important human needs in nature? Like, what are the three things
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  that if you don't get, you die? I'm like, oh, that's easy to answer that
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  question. They're like, what is it? I'm like, water. If you don't go for
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  water for three days, you die. You learn this when you're in school at like grade
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  four flipping geography. You learn whatever it is you're in,
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  what class. You learn pretty fast, outdoor education. that
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  if you don't have water in three days, you die, right? We all know this. Then, second
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  is food. If you don't get food for three weeks, you die. Now, that's
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  how I grew up and that's what I learned, but it's wrong. The
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  one basic human need if you're in nature and you need to survive and
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  you don't get it first, you die. And
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  it is shelter. Shock, I
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  was like, what, how? Because of things like exposure. Hypothermia,
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  right, can cook you, well, it doesn't cook you, hypothermia does the opposite. Hypothermia
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  can freeze you to death, right? And if you don't get shelter, you're exposed
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  to the elements. It's very, if you go without shelter for
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  three days, the impact to your body is irreparable.
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  It can really kill you. So think about that. We're
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  actually making shelter the number one human need. We're making it
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  unaffordable for our citizens. I've never said this
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  before, but it's a flippant disgrace. It's a disgrace.
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  It's a disgrace. We should be, I mean, the fact that there's
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  not many... We just take it on
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  the chin, right? It's not, and
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  if you're one of these people who's bought, have taken this, have
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  risen or have floated up on this high tide of
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  property prices, and you're all high and mighty, well, that's great for
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  you, but what about your children and grandchildren? Like, I think about
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  my niece and nephew, like, what are they gonna do? It's like, oh,
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  we'll bugger them. We've got wealth in our family. Well, that's a
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  very narcissistic, arrogant approach to take. Our
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  senior generation or the policies being made in this country are not
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  supportive of young people next generation. It's a God, it's a disgrace. It's
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  disgusting. Politicians should be limited to one house. They
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  shouldn't be incentivized to buy multiple houses because they can make policy that
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  pumps property prices. They can immigrate this country where they're doing it right now.
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  Okay, we'll come to that in a second. So the reason why that's happening, the
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  reason why this happened is two reasons. Why property prices are way outperforming
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  wages. It's because of this. Firstly,
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  interest rates in the 70s were at about 17%, because they
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  had to break inflation, right? Paul Volcker came out, he
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  was the chair of the Federal Reserve in America, and the world was
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  kind of sitting at high interest rates of 17%. And what he had to do was he
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  had to lift rates up to get inflation back down, and he
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  lifted rates to 17%. And when he did that, What
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  happened was when you raise interest, this is an absolute economic policy.
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  If you've ever studied any level of macroeconomics, this is an
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  absolute fact. It's physics. It's not, it's mathematical, which
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  means it's not up for dispute. But when you have, when rates
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  go up, and by rates, I mean the interest rate at
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  the reserve bank, when it goes up, the
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  value of assets falls. Because the
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  value of the future cash flows discounted back at a discount rate,
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  it's called the time value of money. When you discount those future cash flows back
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  to a net present value today, the net present value formula, which
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  is a mathematical formula you learn in any finance education, right?
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  When you discount them back at a high interest rate, the current value of
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  the property or the asset, whatever it is, shares, property,
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  bonds, is less today. Let me
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  just rephrase that for you so you understand. When you have a high interest
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  rate and you discount the future cash flows back from
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  the future to today's value using a high interest rate,
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  it means the asset is a lower value. So that's
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  why in 1990, when rates were at 17%, property
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  prices were very low compared to your wage. In fact, two to three
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  times annual wages. So if you were making 50 grand back then, a property
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  was about 100,000 to 150,000. very affordable, everyone
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  was buying, it was easy to pay it off, no dramas, okay? That's
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  fine. That's actually very, three to four times earnings is a nice fair
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  value. And in America right now, it's about 4.5, which is very
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  reasonable, okay? In Australia, it's 13 times
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  earnings. And in Japan in the 90s, before the
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  great kind of sort of big property bubble back
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  then for Japan, It was at 18 times earnings. So
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  we're not too far off. Anyway, so back in 1990, when
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  rates were all time highs, property prices were all time lows. But
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  guess what happened in the last 30 years? Yes, you guessed it.
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  Rates went from 17% to 1%, 1.25%, from 17 to one. So what happens when you drop rates?
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  It does this, it does this. So
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  when you drop rates, you lift asset prices. That's
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  because the future cash flows are discounted back at a lower rate, which means the asset value
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  is worth more. So you haven't been in a property boom,
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  you've been in a rate reduction cycle of 30 years. And
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  you didn't create that. You're not a genius. You're not that smart.
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  You just bought, it's the timing. Arguably, honestly,
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  it's luck. You happen to be born in
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  19... in the 1960s. That is the ovarian lottery. You
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  didn't plan that. You flipped it.
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  And now you're like, I'm flipping property investment. Well, let's see what
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  happens when interest rates go
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  back up. They used to be at seven and
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  a half percent, which is about roughly on average in the last thousand
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  years what they've been at. It's only recently because
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  of COVID that they really, and the GFC, that they really dropped them
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  so drastically. It's truthfully, like it's only recent. In fact,
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  interest rates got as low as pot, as low as they've ever been
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  for 5,000 years in your lifetime. So
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  think about it. What happens when rates go back up? Yes, the value of your real estate falls.
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  Welcome to the party. You get it. What's holding it up and
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  propping up unnaturally is we're immigrating 600,000 people
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  to this country every single year. The average over the last 10 years was about 200,000, so
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  it's tripled. Of course, you're going to have stress
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  on the infrastructure and the housing of the country because you're not building enough houses to
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  house them. And it
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  just doesn't need to happen. It's a policy that can be stopped immediately by
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  government. But the reason why they're doing it is because they don't want to face a recession, because they don't want to
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  get out of power. And they also, guess what? They own half
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  a dozen houses themselves. It should be
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  bloody banned, I tell you, for them to have houses, because they're making policy to
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  pump their own bloody equity up. It's an absolute disgust. I'm disgusted. You
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  can't tell. Disgusted. Thanks for listening to Money
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  Grows on Trees. If you enjoyed the episode, leave a five-star review on
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