Investopoly Average incomes can’t drive property prices perpetually higher
Commentators often refer to the price of property in Australia relative to household incomes. They highlight that property prices have risen two to three times faster than household incomes. They conclude that property growth cannot exceed income growth perpetually.
Obviously, this is unsustainable at a macro level. I’ve written about the factors that contributed to property price growth over the past few decades here. But many of these factors won’t repeat themselves over future decades.
However, I argue that this commentary isn’t relevant to investors if they invest in investment-grade property. My thesis is that if you invest in locations that attract the wealthiest 20% of Australians, it is likely you will enjoy an above average capital growth rate.
Wealth inequality is a terrible phenomenon
Wealth inequality means that the rich get richer, and the poor get poorer in a real and relative sense. It makes escaping poverty more difficult. It robs people of equal opportunities. It’s a terrible phenomenon.
The chart below demonstrates how significant wealth inequality is in Australia. The wealthiest 20% of Australian’s own more than 73% of the total personal wealth in Australia – the 80/20 rule at play.
It would be lovely to think that Australia will create greater wealth equality in the future, but unfortunately, I don’t think it’s likely. In fact, wealth inequality is likely to get worse, not better. Unfortunately, Covid exacerbated it as higher income earners were typically able to work from home. Rising interest rates and inflation are much less of a concern to wealthier and/or higher income earners. All these things make wealth inequality worse.
Therefore, when making investment decisions, it’s prudent and advisable to assume that wealth inequality will continue. If it does, its likely property price growth rates in blue-chip locations which attract the wealthiest Australians, will materially exceed outer suburbs.
Is there a relationship between average suburb owners’ income and capital growth?
The theory is that if you invest in suburbs where the occupants earn above average incomes (based on census data or similar), then those suburbs will experience higher rates of growth because occupants can afford to pay more. Whilst this sounds logical, in reality, income dat
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