The inflation adjusted returns on property rents
is zero. The value of property has grown astronomically,
but the real returns of rents haven't, which is like a company growing
massively, but the real profits haven't grown. When rates go
up, asset prices are discounted back at a higher value, which
makes the net present value lower. It's a mathematical exact certainty.
You can't deny it. The property boom wasn't necessarily built on the bricks.
It was built on mums joining the workforce in record numbers. And
here's why it can't be repeated. The standard mortgage go from 20 years to
30 years. Now it'll be 40. Then it might be 50. Isn't
it more like slavery? The Australian property market is well overdue
for a massive correction. It's in a bubble. I'm Lloyd James Ross, seven
figure investor and entrepreneur, and I've helped thousands of business owners and
professionals turn financial stress into success. If
you're stuck in old money habits, overwhelmed by investing or unsure where
to start, this is for you. I'll give you the mindset and
strategies to take control, grow your wealth and achieve financial
freedom. It's time to make your money work for you. Is
Australia's property bubble about to implode? Today,
we're gonna unpack the real numbers behind Aussie property, and
why the last 50 years is probably a one-off
miracle that cannot be repeated. I might be the
only bear in the Australian economy at the moment, I
get it, but after I finish this episode, I
believe you will believe me when I say that I can't see
it repeating what it's done in the last 50 years because of
these four main items we're going to run through with
you today. The first part of this episode is to
understand the golden era or what
I call the golden illusion. It's an illusion because to think it's going to repeat would
somewhat be succumbing to some recency bias to
suggest that what we just went through in the last 50 years will happen again. And I
mean like from the early 1980s up until now, so 45 to
50 years of absolute amazing property
gains. And so let's look at the golden illusion. Houses
grew or property grew in Australia, say from 70s up
to now, over the last 50 years, at around about
7.5% a year, which is unbelievably good. 7.5% a
year. Typically, bonds produce currently at
around about 4% to 4.5%. That's the risk-free rate. So anything above
that, if you look at the inflation rate of, say, core inflation
at 3%, what you're able to do with 7.5% is you're able to
beat inflation and get a reasonable return on your money. which is why
it's done so well. And it's done even better for those who've got leverage, which
is what's happened over the last 50 years. So you're getting
7.5% return on leveraged equity. So
it sounds amazing, right? But if you peel back the layers, if
you look at the last 50 years, inflation has actually been more like 5%, just
under 5%. And so if
you look at seven and a half percent minus five, the real returns on
property have been like two and a half percent. And so it's
not great. It's not great. But of course, again, what's
helped it is the leverage. So if you buy property for say, I
don't know, $500,000 as an example, and you've put $100,000 down,
you're borrowing 400K. And if the property doubles, you're
getting a massive five X return on your
$100,000 equity. So it's producing, massive equity
returns or returns on cash for
deposits, which has obviously created some wealth in this country, right?
A lot of wealth in this country. But here's the thing. Over
the course of that time, rents have grown
almost in lockstep with inflation. And I look at
our own place where we rent, and yes, I'm a renter. I'm a proud peasant
renter. I call myself a peasant. And when I get telemarketed,
they say to me, hello, can I please speak to the property owner? I say, I'm
sorry, I've got to stop you there. I'm a peasant. They say, what? I
say, I'm a peasant. They go, what do you mean? I'm a renter. They just giggle. And they get off the
phone pretty quick, because they want to sell to mortgage owners. All right. Our
rent, so we've been living in the same place for, we're now in our 13th year.
Same property, same rental, beautiful apartment on the river, it's nice,
great location. We've been there for 13 years because we can't find
anywhere really better to live. It's really good. And so, we live
in this apartment. Now, we were paying x rent for
it 13 years ago. And it actually applied the inflation rate
onto that and it got it up to almost, not quite, but almost
to today's rent. So what I realized was, We're actually paying, pound
for pound, when you factor in inflation, we're paying the exact, almost,
not quite, the same rent as what we were to begin with.
Fascinating, isn't it? So the real yield to
our owner, our landlord, is actually identical when you factor
in inflation. So I actually did that on our own property in
the last 13 years. So if you look at that, then it's a little
bit like, well, if the inflation
adjusted returns on property rents is
zero, which is what it is. then it's
like a company that is producing profits, but inflation
is rising at the same time as the profits. So by and
large, 13, 14, 15, 50 years later, the
business is actually not producing any more profits than what
it did pound for pound when you bought it. Yet
the value of the business has grown. So the value of property has grown
astronomically, but the real returns of rents
haven't. which is like a company growing massively,
but the real profits haven't grown. And when you find that in a
business, say in the stock market, a company that's growing massively, but
without any growth in profits, like Palantir, you
will find that it will come to a reckoning and
the value will fall back down to a reasonable value. So it's
like a PE ratio in stocks. the
price to earnings ratio in stocks where in property it'd be rent to
value of the property or rent to price. So you buy a property for 500k, it
rents for 25k a year, the P multiple is say 20. So
you're seeing this massive multiple expansion in the housing sector and
rents aren't really keeping up. What that tells me is it's driven by a
massive demand, but also the demand, where's the demand
coming from? And as you'll discover, it's coming from four
main factors driving it, that I don't believe, and
a lot of other property bears out there, my friends on X, if
you haven't followed me on X, go follow me on X, because man, every day I tweet
on there too. And I've got some friends on there that believe me as well, that we
were in this together. that we feel that the Australian property market is
well overdue for a massive correction. It's in a bubble. It's very obvious.
We don't know when, of course, but I have some friends in this fight
with me to suggest that it is. So there's four things
that drove this demand. It didn't come from nowhere. So what are the
four factors? We're going to unpack these four factors now. So get a short
pencils better than a long memory. So grab a notepad if you want to take some notes if you want to. But
this is what has driven the demand of the last 50 years, creating
this massive price rise but no rental increase pound
for pound from inflation. So the very first thing is this. The
very first or what's driven
this demand is effectively debt. It's
kind of created this rocket fuel. And what's
happened is there's been a massive increase in borrowing power.
So it's not been the fundamentals of any productive gains in
property. It's been the borrowing power of purchases over
time. And the borrowing powers come from four ingredients, right,
that I want to talk to you about. And the borrowing power effectively perfectly
matches the growth in
housing. So if housing in the last 50 years has grown by 7.5%, the
actual borrowing power has also grown by 7.5%. So
prima facie on the evidence, it seems like the demand has
come purely from borrowing. And that's
a little bit like someone who's in their house and all of a sudden you see them with a
nice car and they put a pool in and then kids are
going to this nice school and they go on these ski holidays to Aspen and you're like, whoa, they
must be doing well or they just borrowed all the money to do
it. And so that's kind of what's created this machine of house
price buying in the last 50 years. So they didn't grow
because houses got better, they grew because banks started to
lend more loosely and people were able to borrow more. So
it looks like there's an unstoppable money machine but if you open the hood and look inside, the
growth didn't come from the houses themselves, they came from the borrowing capacity. the
capacity is a once-in-a-lifetime occurrence because
of these four factors that have been compacted into each other. So you're
ready for the four factors? Let's move into the very first
factor and we'll break them down one by one. The very first factor is this one. And
I've said this on previous episodes before, but I want to just nail it. Falling
interest rates. This is the big one. Check
it out, right? In the 1970s, when Paul Volcker
had to lift rates to beat inflation from the oil embargo, when
inflation was running at like 15%, he had to lift rates to
17% to break the inflationary or break the stagflation, which he did,
thankfully, right? Would have printed the money into oblivion. So
when that happened, interest rates went to 17%. 18%. That's
why they were there. Now, when rates go up, this is an economic principle. Listen
very closely. When rates go up, asset
prices are discounted back at a higher value, which makes the net present
value lower. It's a mathematical exact certainty. It's
a mathematical formula. It's a physics thing. You can't deny
it. It's maths. And so when
you have high interest rates, you're going to have a lower net present value of the asset.
So that's why when rates were really high, asset prices
were low. That's why people were buying houses for
one times annual earnings. In the late 70s, you
were earning six grand a year as a wage and property might've been eight grand to
buy. Not the best property, but you could still get it for a reasonable price,
right? It's like being able to buy property now for a hundred grand, okay?
And so that's because rates were high, because no one wanted to borrow any money. Who
wants to borrow money at 18%? People were still doing it because the prices
of property was so low, you could still do it, okay? So that was
happening. But of course, interest
rates went from here, 18%, and over time,
they fell. They fell. They fell, and
they fell, and they fell, and they fell, and they fell. And they fell to 0% in
COVID. So for 50 years, they've
gone from 18% to 0%. And
of course, what happens to asset values when you drop rates? Asset
values rise because debt becomes cheaper. And
so you get this movement of debt money into
asset values. It's a valuation boost because of
rates. So this is what happens. Asset prices are
inversely correlated with interest rates. Fact. Talk
to any economist. Talk to Warren Buffett. He'll tell you, right?
So that's what's caused cheap money to be created, right?
It's the wind beneath the wings of every property bull market. And
the wind is now gone. I
know the RBA wants to bring the wind back. I know everyone
wants the wind to come back. That's why they're dropping rates to 3.6%. I
know. But guess what happened this week? They did it and inflation went
back up. Uh-oh. Oh, we
can't drop our rates back down to zero, man. How are we going to keep this property bubble
going? That's what's happened. By
doing that, the borrowing rate has doubled, okay?
Not because anyone's earning more rent, but because households are now
pledging, they're pledging more to the bank, right?
So that's what's happening. So the inflation, sorry,
the interest rate cutting has created this massive bubble,
right? Here's the next part. Just quickly, if
you're ready to take control of your finances but feel stuck on where to start,
I have a solution. My book, Money Buys Happiness, simplifies
investing and wealth building with practical steps to help you achieve financial
peace. Get your copy via the link in the show notes and let's get your
money working for you. Now back to the episode. The second big
factor that cannot be repeated. There's maybe one
way it can, which we'll talk about at the end, but it just came to me. I
don't see how this can be repeated. It's the income revolution. What
that means is back in the 70s, 50 years
ago, when this property boom began, when interest
rates started dropping, what we started seeing was women effectively
were moving in from just managing the household, raising
children, and more of them moved into earning
income. Women were still working, but en masse moved into the workforce. And
they started taking on full-time careers. So it went from maybe what might have been a part-time
income or no income to a full-time income. So you had two
of the couples both working. If you think about that, if the
husband was working as an example and he was making $25,000 a year, The
woman starts to work full time and all of a sudden they're making 50,000 a year. So
they double their serviceability, right? And
they increase it drastically. They may not have doubled it, but they may have got way up
there. I think the data suggests 1.6 times. So they've improved or
increased their capacity to
service loans by 60%. That
obviously means they can borrow more money. Their serviceability went way up. That
just meant that they could buy more, they could borrow more to buy a bigger house
and upgrade. It starts to bid the price of housing up. Does that make
sense? That's what happens when you borrow money. You have to
service the loan. All of a sudden, they doubled their
servicing ability. The property boom
wasn't necessarily built on the bricks. It was built on moms joining the workforce
in record numbers. And here's why it can't be repeated, because
there's not a mom and a dad and another mom. Well, in some weird households, maybe
0.001% in America, there might be, maybe in Australia, I
don't know. But generally speaking, it's the husband and
the wife, or it's a couple, right? So
you can't just add a third person, right? You
can't do that, unless you start bringing workers into the home, right, polygamy. It's
just, it's not gonna work. You can't pull the lever again. Okay,
so side by side, 1970s family versus modern family, it
shows one income versus two. So we didn't get richer
necessarily, we just added another breadwinner to the mortgage. Does
that make sense? Now, the only possible, possible
way, no I can't, potentially
if children stay at home and start working and
bring in that income to that household, then
yes, you could, but culturally, are we gonna
start living with mom and dad for the rest of our lives? Probably
not. Possible, unlikely. So
will we see another full-time income come to
the household? I would say unlikely. So can
it be repeated? No. You're not gonna see that doubling of borrowing
capacity be repeated. So what's the third one? Longer
mortgage lengths, stretching the rubber band, right? And you're
probably seeing noise of them offering potentially, maybe in the future, offering
40-year mortgages, particularly if you're only putting a 5% deposit down, okay?
So mortgages in the 70s and 80s, they were typically 20 years. Today,
they're 30 years, standard. And
some banks, you can stretch it further because what happens is people pay
down a lot, get the equity, go buy something else, reset it. They reset it.
So we're really living in perpetual mortgage world. It's
just become such a normal part of people's payments
every month that, oh, our mortgage payments is falling. Let's go
get a bigger house. Let's bid the price up again. And let's go reset our
mortgage for another 30 years. Because real estate never goes backwards, right, honey?
Right? So you're seeing the standard mortgage go
from 20 years to 30 years. Now it'll be 40. Then
it might be 50. And what you start to see is you start to then move
into a situation where it's kind of becoming more like a long term lease, right?
Where you really the bank owns the property for most of your life, okay, on
paper. So what happens when you extend the
term for a mortgage, is you reduce the
repayments, but you increase the total interest payable over
that time period. So what you might think feels
good in the short term, because yes, you can service the debt better with lower principal repayments,
but you're gonna pay a ton more interest over time. In fact... you
will pay more than the entire value of your house on
a 30 year loan term just in interest. So for
example, if you're buying a million dollar house today and
you're putting down a 5 or 10 percent deposit, which is what most
people do, 10 percent, and you're borrowing for 30 years, you're
going to pay more, not the same, you'll pay more, probably
1.25 to 1.5 times more than the value of the house. So you'll
pay 1.5 million dollars in interest and
your house was bought for a million. People are like, yeah, but my house grows. Yes, but
it's just offset the interest cost completely. So there's no actual gain.
Does that make sense? So you're
going to be paying a ton of interest. And the longer the loan terms go, so
if we push out the 50-year mortgages that aren't really realistic, you're
going to have lower repayments, but you're going to pay a fortune in interest. It's
going to feel like a lease. We didn't make housing more
affordable. We just kicked the can down the road. So that's what happened
when we extended mortgages. And I can't
see that, like what are we going to do? A hundred year mortgages? You
might see 40, but geez, like we're pushing it, aren't we? Like
how many of you really want to be in debt servitude for 40 flipping years? Maybe
some of you do. I mean, I go down the M1 every day and I see people in the
rat race working extremely hard, sacrificing their best
years of their life to get to
a point at 65 and just have their house paid off. That's their one goal in life. It's
like, oh my God. Really? That's
what I was put on earth to do is just pay the mortgage off. I mean, it's a
goal, but with 40 and 50 year mortgages, isn't it more like
slavery? So what's the fourth
factor that can't be repeated? I mean, how do we go, how do
you lift 20 to 30? How do you lift 50% again to 45 years? I
don't know if that's going to happen. Possible, possible. That's probably one of the few
that can be repeated, but geez, I hope it doesn't happen. The
fourth one. real wages growth, like
real wages growth. So actual productive gains in
the labor market. So from 1973 to today, effectively,
wages grew about 5.8% per annum on
average, nominal, which gave the banks more
confidence to lend more over time. So
it allowed people to commit to big loans, knowing
that their wages are going to rise in future, keep servicing those loans to
manage the burden, to soften the blow, right? But today,
real wage growth is weak. It's weak. Real wage
growth is weak. There's been times where like per capita GDPs flat
in Australia for the last seven quarters, almost two years. And wage
growth has been anemic. There was a very short time period there
in COVID or post COVID where the wage growth grew a
little bit because of there was under supply of
labor to the market and high demand jobs. But by and large, over
the last however many years, again, it's five, it's not much. It's
not drastic, put it that way. Today,
real wage growth is like less, it's 3.8%. It's barely keeping up
with inflation. In fact, it's probably meeting inflation. So
without strong wage growth above inflation, you
can't take on any more debt. You're not able
to because you're not getting any real growth
in your income. So as the as your debt's
kind of like being serviced by the interest rate too, you
can't out-earn the returns or the repayments of
your mortgage. So it's not like you can just go and borrow more, basically. So it
just caps the borrowing rate when our wage growth is not keeping up
with inflation. Now, I think also with AI, the onset of AI, what
may happen is certain workers may become more
productive. Whether they'll get paid more, I don't know. But what is definitely
happening is that jobs are being lost en masse. in
sectors that you would never have imagined three years
ago would have ever dropped off, like white-collar jobs. I
know people that are like, oh, yes, the white-collar jobs. I'm in
a blue-collar job. This is going to be awesome. We're going to have all the work. Yes,
but who are your clients? Who are your customers? Let's
say, for example, you have more of a blue-collar style job where you've got
a window washing business. Well, if all the white-collar jobs
are gone, whose windows are you going to wash? It has a massive impact on
everyone. So AI may bring on board the
mass extinction of jobs, not suggesting, well, I don't want
to be this fortune teller with this thing, but it's starting to
happen. It's starting to happen now. So
what will be the impact on wage growth if we're starting
to be replaced by robotics, AI, et cetera, et cetera? How's
that going to impact things? We're not going to see the same 5.8% growth
in wages like we saw in the last 50 years. So it's unlikely to
be repeated. And you're also looking at demographics. Look
at the baby boomer population, that's why they're called the boomers, from
World War II. The baby boomer generation also
produced substantial amounts of innovation, productivity,
gains, etc. And we're now having to import and
immigrate, we're actually immigrating unskilled workers. And
so how are we going to repeat this
baby boomer demographic? And also when the baby boomers
die, who's going
to get all their housing? So if you have this massive influx
of immigration for a period of time, well not immigration, from baby boomers and immigration, and
you got all this housing to service the baby boomers and all the nursing facilities and
everything, all the old age, and that comes off the ball, the millennials
can't quite replace the baby boomer generation. It's a little
bit less. But what's going to happen to
their houses? It's what's happening now. So
you're getting a lot of these big houses and
we don't have the birth rate to replace the
number of houses we have. So we may experience,
and this may happen, this is probably also why they're loving this immigration at
the minute. What may happen is in Japan with
the population fall, housing is super affordable because
they build all these houses for people that are no longer there because they die. That
could happen, right? We're not going to
see the natural birth rate in Australia like
we did after the war. This is not going to happen again. So that's
also something that can't be repeated in the short term. So
we've got an empty fuel tank. So what now? What's happened?
All these four factors have created this Goldilocks, this
golden era in property. And of course, you get the baby boomers saying,
you're going to buy a property? It's going up and up and up. They are
a byproduct of the last of those four factors in the last 50 years, they
are. To suggest it can repeat like that is
very, very, very unlikely. And a lot of them aren't giving
you that advice from data, they're just giving that advice because that's what happened to them. It's
a little bit of survivorship bias in that too. So what
we have to plan and understand is what's going to happen in the next 50 years
for those who are going to be around, right? What's
going to happen? Now that the fuel tank is empty, we've got interest
rates are now normalized. You're not going to get record rates down to 0% again. If you are,
I think it's going to create stagflation. It's going to be a problem. They're going to raise them again. It's just not going
to happen. The second thing is you're not going to see moms
join the workforce again because they're already in the workforce. Couples have to go to work
together at the same time just to afford daycare. You're not going to
see mortgage terms potentially grow
by 50% again. Unlikely. Maybe 40 years. Maybe. And
you're certainly not going to see wage growth like we
have because of the onset of technology and so forth and
demand for jobs. So if we can't repeat that and
we have an empty fuel tank, what now? What now?
What's going to happen? Unless we add a third breadwinner
and we put a granny flat on the property and put someone in there, which by
the way, people are probably doing now. They're like, hey, how do I get a granny flat
and put a third worker in there so I can get some income? Yes? Smart
people are playing that game because it's just so expensive to service a
loan now or to buy a property. They need to do that. So
unless we add that, we're in trouble. So what's going to happen next? Where
do we go from here? Government policy doesn't
seem like it's going to help because they just drop rates down, sorry,
deposits down to 5%. It's going to increase the demand again.
And if rates drop even further, maybe again, they're going to
keep creating this massive bubble. And so what I
anticipate is if we can't repeat the past 50 years, And
we have an undersupply of housing in the country and we have immigration. What
we may see is unsustainable price
growth that's going to definitely collapse. Or
we may see a flat line for many years where housing goes sideways.
It doesn't have to collapse, but it could just go sideways. And
if you're someone who's ever held an asset for 20 years and it's gone sideways, that's
painful, right? Because of your expectations of it going up previously.
So it may not crash, but returns will be tethered to fundamentals.
So rents and wages. So it may just creep up, but
I can't see it going to be at this like seven to 10% compounded
growth rate. Like it's a birthright. Okay. Again,
immigration policy, foreign buyers, maybe some supply shortages
that are happening at the minute. They're going to perhaps. help
it, but they're not going to be able to repeat what's happened, okay? It's
just unlikely, right? To think that
you're going to bet that what's happened in the last 50 years,
the property miracle is repeatable, I can't see
it. It's a little bit like trying to think that the dot-com bubble is going to happen again, and
you can buy all these companies with no earnings and just going up and
maths. So a house is not
magic, it's a financial asset as we've discussed, and
the math will always win. I know it doesn't look like it,
and Ben Graham, who's Warren Buffett's mentor, or
was his mentor before he passed away, he said that in
the short term, the market is a voting machine.
But in the long term, it's a weighing machine. So right now you're
seeing people vote with their feet with the demand, people buy all these houses, that's
a voting machine. It's not based on fundamentals. And long term,
it's a weighing machine, the math will always win. So,
is it time to rethink how you approach your wealth? Well, it
definitely doesn't mean, and people have asked me this, do I sell my house? It doesn't mean you
go out and liquidate your house. It just means to
think or anticipate that the last 50 years
of gains is going to happen to your place is probably unlikely.
But does it mean it's going to collapse? Not necessarily. So you don't have to freak out
and go, should I sell my house? But probably understand that if you've got
capital and you're going to deploy it into real estate, to think that it can repeat
what it did is just unlikely. That's all. It doesn't mean you're also going
to get nothing. It just means it's going to grow a lot less, I would think. And
so you've got to start exploring ways to
grow your wealth outside property, which is where
I've basically created our wealth. I don't own a
single property. I'm unmortgaged. I'm
unmortgaged. I have no property. We have no property, but
we have wealth. We have time freedom. We have cashflow.
We have security. We do. There
is a way. Okay. And I'm
excited to talk to you about those on the upcoming episodes of how to build wealth
without property. All right, but go check out other episodes. That's it for this
one. Hit the subscribe button. Come and give me a comment. Leave me
a comment. Come fight me in the comments or come and support me in the
comments. I don't mind. I'm open to anything, but I love your interaction.
Thanks so much for tuning into this. And those who do leave comments and interact and
hit the subscribe button and our subscribers, thank you so much for paying
attention. I hope this has been super informative, but also at the same time, somewhat
engaging, entertaining, and helped you think about property going forward.
See you in the next episode. Thanks for listening to Money Grows on Trees. If you
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