Do property prices double every decade?

19th Jul 2016By: Tim Lawless

While it is becoming increasingly rare, I still occasionally hear the phrase that property values ‘double every ten years’. This rule of thumb used to be bandied about regularly, however the past ten-year period has shown a remarkably different performance, with only one capital city region recording a doubling in value.

Over the ten years between June 2006 and June 2016, combined capital city dwelling values increased by 71.3%, or an annual compounding growth rate of 5.5%. An annual compounding growth rate of at least 7.2% is required for a value to double over ten years.

The ten-year period covers several market cycles. Dwelling values were broadly rising during 2006 and 2007, values fell during 2008, rebounded in 2009 and most of 2010 before falling again between late 2010 through to mid-2012. The current growth cycle has been running since June 2012, with values rising substantially over this time.

Melbourne is the only capital city market where the annual pace of capital gains has achieved the 7.2% benchmark for annual growth, which has seen dwelling values double (just) over the past ten years. Sydney isn’t too far behind, with dwelling values rising by 6.6% per annum. Every other capital city has seen values rise at the annual rate of 5% or less over the past decade, with the softest growth rates recorded in Hobart (1.4% pa) and Perth (1.6% pa).

In contrast, the ASX 200 index has recorded an annual growth rate of just 0.7% per annum over the past decade. So in comparison, the housing market has recorded a much greater rate of capital growth than the equities market.

The performance of the housing market over the previous decade (1996 to 2006) was very different. Every capital city saw remarkable rates of capital growth over this ten-year period with dwelling values more than doubling across all the capital cities. The annual rate of dwelling value growth across CoreLogic’s combined capitals index came in at 10.1% over the previous decade. Perhaps it’s this previous decade of such strong capital gains that inspired the myth that dwelling values should double every ten years.

Looking forward, there is a likelihood that the rate of capital gains will ease over the coming years. The Peth and Darwin housing markets have already moved through their peaks, with dwelling values in both cities declining by approximately 7% since their 2014 peak. The growth run in Sydney and Melbourne probably can’t last much longer, considering the affordability constraints that are becoming more obvious in these markets as well as low rental yields and tighter financing conditions which are likely to dampen demand in these markets.

While the rate of capital gains is likely to slow at a macro level, dwelling value forecasts released by CoreLogic and Moodys Analytics indicate that some cities will see the rate of value growth gather some pace over the coming year. Brisbane, Canberra and Hobart all show some acceleration in their rate of growth after market conditions have underperformed the larger capital cities for the past two growth cycles.

The recent decade highlights how cyclical asset values can be; values don’t always rise, they also fall and track steadily. The key lesson for investors based on the past two decades of data is that property values don’t always double over ten years. Therefore, it may be better to err on the side of caution and factor in more conservative growth estimates when planning to invest.