When does property stop making sense as an investment class? (Interesting Graphs)

First up, certainly not looking to replicate the recent threads discussing haves and have nots, etc.
But recent discussions of affordability certainly got me thinking. So I have done some analysis of my own. This isn't a poor us thread, but rather a 'what's next?' thread.

To stimulate discussion, I have put together some interesting graphs.

First Graph:
Australian house price index (weighted by population and adjusted for inflation)
Takeaways:
- Rents have remained relatively stable when adjusted for inflation
- Property Prices haven't. Given the nature of an investment class, you would hope a better than inflation return, so maybe that isn't all bad.. however at what point does the yield become unsustainable? Let's check out graph number 2.


Second Graph:
Gross Yield (of the above) vs Inter-bank Interest Rates
Takeaways:
- Low interest rates are certainly enabling the acceptance of a lower yield.. But at current rates 1.5%, where else can they go? Negative interest rates are not a sustainable proposition for the longer term.


Third Graph:
Housing Prices vs Inter-bank Interest Rates
Takeaways:
- There is certainly a relationship between the lower rate market and the continued aggressive growth in the price index.


So this leaves the following questions:
- As an investment class, when does property lose viability? Given its ongoing viability to date has been aided through lower interest rates (a global issue), and rents seem to be relatively pegged to inflation, it's not a far-cry to forecast continued lowering of yields.
- While a 'crash' is unlikely due to the heavily vested interests of the too-big-to-fail, can we honestly expect performance as we've seen over the previous 4 decades over the next 4? If so, how do you think it will come to play?

(Side note, I'm no statistician, so any issues with the analysis, please feel free to let me know).
Obviously markets within markets, etc. Always opportunities for those that look. But on a macro scale, where to from here?

 

The first problem: theres no such thing as a 'national' house. These graphs dont help with investment decisions. Look back at each citys market in the past: how to apply these graphs?

 

Good post and good questions. Speaking of yield, I'm in Perth where rental returns have plummeted. It is a consideration.

There are options for investors though.

For one property, I am building a two storey house in the huge and previously vacant back yard while retaining the front house and current tenant. This improves the yield from roughly 3% gross to roughly 6% gross across the whole site and takes it from negative cashflow to positive cashflow.

For another property, I bought it cheap at a low LVR (~70%) but am converting it from a 2/3 bed x 1 bath to a proper 4x2 with 2 living areas. That takes the yield to ~6% and cashflow positive.

This is the type of property investment that is viable for me. Buy and hold never was.

 

No, but we all can't buy the same house. But we all can invest in 'the Australian property market".
The broadness of the scope is for macro discussion not for individual purchases.
Looking at trends as a whole can pose interesting questions.
Look at the share market indexes, almost didn't matter which share you bought, you were affected by the GFC. Don't discount market discussion just because it doesn't provide an ideal purchasing deal.
I personally see it as part of the broader picture and useful context for when we are deal/investment hunting.

I think you have hit the nail on the head.
It does seem as though, more than ever, that property investing will need to be a more active engagement.
It's either that, or viable property investing will only be possible at lower LVRs in order to reduce the holding expenses. However the yield trajectory is concerning, and reducing the LVR for a viable investment certainly makes shares look more enticing.

 

Yep. I should have added if I was stuck with a 3% gross yield with property, I would not bother. With vacancies, tenant hassles, falling property prices and falling rents in Perth, it's just not worth it for 3% gross. I would look at LICs instead and use leverage (loans secured by residential property) to buy them.