Experts Say Housing Is A Lousy Investment And Always Will Be

Real estate experts in the U.S. suggest houses are now a bad investment, indicating there is no law to say real estate will appreciate in value.

For a century prior to the great housing bubble that started in the 1990’s, house prices only appreciated in line with inflation. This ensured your great grand parents paid the some portion of their household income for housing, that your grandparents did, and that of the baby boomer generation. But then in the late 1990’s, something changed. The experts said real estate only goes up, some suggesting that house prices double every 7 to 10 years. With access to easy credit, this fueled one whopper of a housing bubble around the world.

Now that the bubble has burst, experts agree with Stan Humphries, chief economist for the real estate site Zillow saying house prices will only go up with inflation. “There is no iron law that real estate must appreciate, All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Dean Baker, co-director of the Center for Economic and Policy Research says “People shouldn’t look at a home as a way to make money because it won’t”. He estimates it will take 20 years to recoup the $6 trillion USD of housing wealth lost since the start of the housing crash in 2005.

» Housing Fades as a Means to Build Wealth, Analysts Say – The New York Times, 22th August 2010.

» Now They Tell Us: Experts Say Housing Is A Lousy Investment And Always Will Be – Yahoo Finance, August 23, 2010.


  1. Please stop posting articles in relation to the U.S housing slump. They have very different variables i.e taxation, population, employment.
    It’s not the same as here.

  2. hahaha, “its not the same here”, or wait…”we’re different”.
    I’ll give you 6 months suckers !

  3. “It’s not the same here” … hahahahahahaha hilarious..

    It’s wasn’t the same in Japan either eh? That tiny island, millions of people, land shortage, how did prices ever fall there?

    Unfortunately all the spin in the world won’t save the housing bubble – why do you think neither party touched the subject during the federal election? Neither side wanted to have a broken promise that could be replayed next election when it all goes pair shaped in the next 3 years..

    The baby boomers can buy all the “investment” properties they like, but eventually they will die.

    The government can give all the tax breaks it wants (sorry negative gearing), but it will eventually be unaffordable to do so.

    The only way out of this mess unfortunately is massive inflation 10-15% per year for the next decade…

  4. It’s amazing the number of Australian’s that still have their head in the sand. You could understand why many Americans didn’t foresee their bubble bursting – it was the first domino to fall in the world. But then dominos started falling in other countries, the UK, Spain, Ireland, you name it. One, by one they all full over. The cause all the same, too much household debt spured on by easy credit and intense speculation.

    Canada and Australia are one of the last bubbles to burst. Canada is already showing signs of weakness, not unlike Australia. Mortgage approvals are falling; plunging in fact. Clearance rates are falling. Let, the average Australian (or Average Bloke) still can’t put two and two together to save their life.

  5. Sorry guys , I will once again explain that I’m all for a housing correction. The price of average homes in this country is absurd and the way our government supports this madness is sickening.

    However I stand by opinion that we have a different set of variables here in oz compared to the U.S and the U.K … Canada is probably the most similar to ourselves.

    The U.S has:

    1. High Unemployment.
    2. No Government Negative Gearing Ponzi Scheme.
    3. No First Home Vendors Grants.
    4. A different Banking System when it comes to Mortagage Defaults.(key toss)

    That’s for starters.

  6. I agree we are different but not in a positive way.

    1. The bubble in Oz is far probably larger than the one which has burst in the US. (ie 3.2 times GDP versus 1.8?)
    2. Jingle mail doesn’t necessarily make a bust worse. In Oz, staying in your home will mean sacrificing consumption which is a broader negative to the economy – there’s your unemployment – keep in mind that Oz is a consumption and service based economy).
    3. Is negative gearing a support for bubble prices which limits the downside or is it the reason for the larger bubble? My view is that it’s a negative which has increased the risks of decline because of the size of the bubble. It’s amplified the boom, increased the speculation and ramped up the debt because the bigger the debt the greater the tax loss. A decline in prices, could see “investors” run for the exits.
    4. Unemployment followed the burst in the US. Everyone was having a party until that point. In other words we don’t need unemployment to increase for the bubble to burst. All we need is for real estate to decline, wallets to shut, and equity spending to decline and hey presto Australia is in trouble. Unemployment could follow and then deliver a second leg down in prices.
    5. There are difference between Australian banks and US banks. However, Australian banks have pushed credit every bit as hard, and are probably more exposed than US banks to real estate.
    6. The vendor’s boost is a small sum of money relative to the purchase cost so insignificant to the overall price support. Where it is significant is that it acts as a multiplier when going to the bank and asking for credit. In other words the government’s grant is simply allowing people to gear more heavily because they can go to the bank with a bigger “deposit”. Again, this increases the instability rather than decreases it.
    7. Overall, I think we are different but not in a way that makes the outcome of this bubble any better.

  7. Its no diff here Debt is Debt its that simple mate and the time has come to pay our debts, IF WE CAN!

  8. 1. Most organisations are carrying a lot of fat. I work in one, and can get away with not doing a scrap of work for a week! It was the same at the previous place I worked at too, long lunches, coffees, extended holidays under the guise of ‘working from home’. Unfortunately organisations could slice this cream very quickly and raise the unemployment rate. It could be even argued that abolishing workchoices, thus making it harder to shaft people, has contributed to keeping the unemployment rate low in Australia. I expect an unemployment rate of 8-9% by 2013, with the many many jobs created by never-ended property prices and stimulus payments drying up. Remember, the whole economy feeds off it. The Victorian Government makes $4billion off stamp duty alone – how many jobs would they slash if this dryed up? The stimulus payments, school halls, insulation.. How many jobs did that save? It will all come crashing down in 2-3 years at most.

    2. The elephant in the room is if we do hit the skids, taxation revenue will decline, pushing the budget further into deficit. How long can the Government sustain the $8 billion dollar cost per year? How much bigger can they afford to let this cost get (as more investors jump in) ? Sooner or later the party will be over for everyone, as the cost of negative gearing will be too much for the government to afford.. If it was to remain, I would think that a rise in the GST would not be too far off the cards, as there would need to be a revenue stream to offset it.

    3. This have contributed to the risk, as opposed to diminish the risk. The vendors boost conned many uneducated people to ‘buy at all costs’ so that didnt miss out forever. I know many of these people (as most of them are my age). Without wanting to sound racist, the bulk of them are from ethnic backgrounds, in low paying jobs, and generally eating two-minute noodles or having to rent out rooms just to make the mortgage payments. Economists and the Government underestimate how many of these first home buyers are close to the edge. It also is prudent to mention that the majority locked in interest rates for three years in early 2009 (at a lower rate), thus these rates will not be resetting until early 2012. Lookout!

    4. Key-toss or not, the risk is only if the banks are forced to sell the property. In the US, the banks were forced to sell the property as they did not have the equity to retain them. During Round 1 of the financial crisis, the Commonwealth bank had the right to forclose and sell over 700 properties in the inner Melbourne belt between South Yarra, Toorak, Malvern, Caufield where many people in the finance industry live. The Commbank instead elected not to foreclose and move these properties onto the market, but instead let the people who were in them “pay whatever they could”. The banks perception was that if they were able to recover even 60-70% of the mortgage payment for a couple of years until the economy rebounded, it would be more profitable then foreclosing. Remember, although the individual in Australia holds the risk, most individuals if they were $200k down the hole would just declare bankrupcy and the bank would still be out of pocket. I believe that this is why the banks are building up piles of cash (equity) now, to position themselves to do the same during the next downturn. The days of the bank foreclosure could be limited, as no party wins from the situation.

  9. AverageBloke never says anything positive about negative articles. He must be an eternal optimist. If I was diagnosed with a terminal illness I’d like him to tell me about it as he is able to put a positive spin on a dire situation.

  10. AverageBloke,

    The US articles and indeed any financial articles from around the world are all relevant, financial history is one of those rare areas that runs common throughout the world, in others words the history both distant and recent paints an important picture that should not be ignored here and in fact could have been used to deal with the issues here had people not chosen to ignore it.

  11. I used to be an optimist but after 8 yrs of non stop house price madness I have resigned myself to the fact that Governments and vested interests have negated logic, gravity and fairness by turning the aussie dream into a taxpayer funded ponzi scheme nightmare.

    The fact is unless changes are made to the NG tax scheme or China and the rest of the world stops buying our rescources … it will continue.

  12. “Apartments” – they fail to mention the body corporate fees associated with these..

    I would dare suggest that apartments would have a lower ROI then houses (and maybe units).

    I don’t believe the capital gains would be as great either, as much of the value of property is in the land itself.

    Apartments in North Melbourne, Kensington and Ascot Vale only return maybe $300-$400 per week.. But are priced around $500,000-$700,000… Chuck in a body corporate fee of $4,000-$5,000 and it effectively eats up 40% of your rental income of the property..

    It could be argued that the wealthy property investors negatively gear apartments more-so then property due to increased tax break..

  13. P.s. In an interesting side note – the rent on my apartment near the city just got dropped 3% today (with immediate effect on the next payment) due to “Market Alignment”.

    I guess a professional male with a high income is highly sought after with all the “for lease” signs up at the moment around my area. It’s all well and good to have an investment property – but where are all the renters?

  14. J. Hill, Did you ask for that rent adjustment or is the Landlord playing nice?

    I have always failed to see how property can out-pace wages for any sustained length of time. Just like a company with a high share price but lagging earnings will eventually be brought back to fair value the same applies for property, or for any asset class you care to mention.

    It all comes but to risk/reward/return on investment/market perception/access to funds/government policy and a whole bunch of other inputs. What is clear to those with an objective view of the situation is that any substantial shock to the market will see prices revert to mean. When and how quickly are the only guaranteed questions. Twenty years on after Japan’s bubble prices there border on heavenly, but the public are shy of taking on debt for an asset that is easily manipulated-Hence their property continues to reduce in asking prices.

    Averagebloke, chin up lad. At least you’re aware of how stupid these prices are. Many Australian/Canadian/Chinese residents are in for nasty surprises over the next few years.

  15. Our IP in Darwin has just settled. We fluked buying at the right time (8 years ago) and luckily made an educated/researched decision to sell a few months ago. I feel grateful that we actually made money out of this whole housing mess.

  16. I didn’t even ask for a rent adjustment at all – and the lease hasn’t even expired yet – so it’s just the landlord playing nice. There are many “For Lease” signs up in my street now (replacing the For Sale signs from three months ago). The rental market in my street has probably dropped 10% given the supply on the market at the moment. And this is 2km from the CBD of Melbourne. I’ve heard similar stories throughout Ascot Vale, Kensington, Docklands and Southbank with investors now leasing instead of holding empty apartments for the capital gain value only.

    As for the many of the Chinese – a lot of their investment is based on the concept of “luck”, with no sound financial backing.

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