Why Does it Make Sense That Property Prices Have Increased 10x in 25 years
In last month’s newsletter, I discussed that the price of houses in Melbourne has followed a trend of adding an extra 0 every 25 years. A house in 1942 worth $1k, was worth $10k in 1967, worth $100k in 1992 and $1m in 2017. Following that trend, in 200 years that house looks like it will be worth $100 trillion and the value of the entire Australian economy.
This month, lets focus on the comparative interest repayments over the past 25 years.
In 1992, a man who bought a house for $100k, paid 17% or about $17k interest that year. The average salary was about $34k, so 50% of his salary went to interest.
Today, if the man’s daughter buys the same house, it will cost her around $1m, and she will pay 4% or about $40k interest. The average salary is about $80k, so 50% of her salary will go to interest. It’s noteworthy that despite the incredible increase in the price of the house, both generations pay the same percentage of their salary in interest. How’s that for symmetry! This goes to show that the entire property boom over the past 25 years can be explained by interest rates dropping steadily over that time. I’ll pose the question…… what happens if interest rates go from 4% to 8%?