I'm Jeremy Sheepard. >> And I'm Daniel. >> We use data to expose deceitful property experts and their marketing BS. >> This is the expert busting series. >> Welcome to episode 11 of the expert busting series. Apples and oranges.
Why long-term outperformance is a myth. Jez. >> Yeah. So, there's lots of uh property investment professionals out there that will tell you you should be buying in areas that have had high past capital growth, but there's no evidence that this works in historical data. In fact, the historical data shows that the longer the period of growth, the more likely every property market will have pretty much the same uh long-term capital growth. So, I like to explain why this phenomenon occurs using this analogy.
the apples and oranges analogy. Now, imagine you walked back uh in time a 100 years ago into a fruit shop and there was a crate of apples on the left and a crate of oranges on the right. Now, if apples grew at 4% peranom, let's say they cost 1 cent to begin with and oranges cost 2 cents. Now if apples grew at 4% peranom and oranges grew at 8% peranom then after 100 years you would have oranges sorry apples worth 50 cents and a and uh oranges worth $44. In other words, you could buy 88 apples for the price of a single orange. Now, picture yourself walking into a fruit shop and you've got a crate of oranges >> for $44 each and you've got a crate of apples for 50 cents each.
Now, what are you going to buy? It's still just an apple, still just an orange. Why the massive price difference? Simply because one grew at 8%, the other grew at 4%. So, there's a difference between apples and oranges and that's factored into their price. What are people prepared to pay?
Do they pay more for oranges or do they pay more for apples and by how much? Unless the nature of apples changes or oranges changes, that same percentage difference is going to be there 100 years later. So, it's still just an apple. It's still an orange. The orange doesn't do your tax for you or go to court for you. It's still just an orange.
Uh so, what we've got is this tendency for all property markets to grow at the same rate over the long term. The longer the period of analysis, the more likely it is that you're going to see two properties, two streets in the same suburb, two suburbs in the same city, two cities in the same country grow at the same rate. >> Okay, I've already explained this. Oh yes, sorry. Yeah. So, some I have used this analogy before and someone actually challenged me and said, well, I don't know if that applies to property.
That could just apply to fruit. It it is just an analogy, but all you have to do is replace the word fruit shop with street. Replace the word apple with property A along the same street, property B along the same street. So imagine you had um a $500,000 property in and in the same street you've got a $44 million property and yet a hundred years ago they were almost the same price. One was only twice the price of the other. So it's just not going to happen.
It's it's absurd. It just simply does not happen. >> Well, you wouldn't say they'd be maybe on the same Yeah, that's right. If they're on the same street, that price discrepancy wouldn't happen like that. >> Yeah. So, maybe a hundred years ago, uh, one of them would have been, say, what is it?
$1,000 and the other was $2,000. So, one was twice the price of the other. Sorry, $10,000 and $20,000. So there some was they they were similar in price >> but whatever one has that makes it twice the price of the other that twice the price of that percentage difference is maintained throughout history unless something changes to the nature of those properties. So instead you might see property A is worth 500,000 and property B is worth a mill. One is still double the other but they have had the same growth rate.
>> Yeah. So why would one have more growth than the other simply because it's started out being more expensive for example and what happens if one does continue to outperform it eventually becomes so much more expensive people looking for a property along that street they find a cheaper alternative and there's more demand for the cheaper alternative there's less demand for the expensive one so it subdues demand for the expensive uh increases demand for the cheap and That's why things just tend to balance out. Anyway, this is all just talk. >> Well, you get a lot of this, don't you, about I know which property to buy on the street. You know, this they'll argue that certain properties outperform that suburb, but that's incorrect. A lot of the time it's like it's already been priced into the asset a long time ago.
So, you might have a suburb where a property is near the water and another one is maybe a couple kilometers further inland and there's a big price discrepancy, but typically they'll grow sort of at the same rate over time. That's right. Yeah. And they might not grow at the same rate for a short period of time, like for a 5year period, but the longer the period you look at, the more likely they will grow at the same rate. >> If anything, I think maybe the lower price one might have a bit more opportunity to catch up to that higher priced asset because you've got more eyes and more demand on it. That one that's more expensive is going to potentially have less of that demand at that that top end of the market.
>> Yeah. especially as it becomes more and more expensive and it exceeds people's budgets. Yeah. So this uh phenomenon is seen time and time again during booms in in city housing prices. So perhaps the more desirable suburbs they start off the the next growth phase for that city. >> But once their growth fa excuse me [clears throat] once their growth phase seems too excessive that's when buyers start looking for the cheaper alternatives.
And this is called the ripple effect. So the growth phase ends with even the most affordable suburbs finally appearing too expensive. Uh and that's when the growth cycle stops. It stays calm for a number of years. Then the cycle repeats with the next boom. But uh yeah, what people fail to realize is exponential growth creates a bigger and bigger margin between property markets in percentage terms and eventually that mar margin uh gets so big that the price difference simply cannot be justified.
So yeah, demand is demand subdues and eventually the growth rate slows. long term it all tends to balance out. Now that's that's a lot of fluff talk, a lot of opinion, a lot of jargon. The proof is in the pudding. Let's see what the data has to say. So I mentioned before that there's this phenomena is seen in the data.
Uh and the the apples and oranges analogy simplifies uh the concept. But uh here's the proof. So this chart shows how likely it is to achieve a certain growth rate over a single year. One year capital growth you see at the top there in the title. So what we've got along the bottom horizontal x-axis is a set of growth ranges starting from the left is the growth ranging from minus20 to minus50%. And the next one to the right is from minus15 to minus 10.
and it goes all the way over to the right finishing with positive 25% to 30%. Now [snorts] you'll notice over on the left vertical yaxis you can see some large numbers there. Uh these are not property prices. These are the count of cases that I found in historical data. Uh so you can see that the most common case is the tallest bar in the middle which is a peranom growth rate of somewhere between 0 and 5%. So that tall bar says there were hundreds of thousands of cases where a suburb grew by somewhere between zero and 5% in a single year.
Uh now other growth rates are possible but they're just not as common as that one in the middle there. So you can see this is this is what uh they refer to as a bell curve. Now to create this chart, what I did was I measured all one-year growth periods for any one-year period in the last um I think it was 35 years. Yeah, 35 years. So it could have been from January 1990 to January 1991 or it could have been from February 1990 to February 1991. So any one-year period in the last 35 years and there are hundreds of those periods.
>> That's regression analysis. Is that what you call this? >> Uh this is not a regression analysis. No. Uh this is just um some simpler analysis. just looking at one-year growth and plotting the you you would call this a frequency distribution.
How common are certain observations? >> So, we're not looking at a point in time. We're not grabbing just one certain period and going, "Hey, this is that one year period. You're looking at it at multiple angles, >> all sorts of any one-year period using the entire history of one-year periods for every suburb around the country." >> And then you've moved on and done it for a two-year period. >> Yeah. Well, just before you move on to that, um just explaining what I did here.
So, I then created uh these 10 growth rate buckets. There are 10 of those um columns that you'll see along that chart. So, the bucket or group on the far left is the group of cases where growth over that single year was between minus 20 and minus5%. So there's there would have been heaps of suburbs that fit into that group. Uh and then yeah, I counted all those cases. Uh and then I plotted the bar on that far left.
The height of the bar represents how many cases that I found. So as you can expect, you're not going to find terribly many years where a property market went backwards by 20%. >> Or 15%. When I look at these graphs, I'd say it's like very highly probable that you're going to receive capital growth no matter where you're sort of buying if you're looking at the proper information. Like you're doing your proper research instead of just throwing a dart and hoping for the best. Like even then you'd have a higher probability of obtaining growth compared to not obtaining growth.
>> Yeah. Because you can see that the the chart is more heavily biased towards the right hand side. There's more >> correct >> above zero than there are below zero. >> Mhm. >> So yeah, over the last uh 35 years there's definitely been more growth um yeah more positive growth than negative growth but you can get that negative growth um before you go on to the next one. So if you can come back to the first year uh yeah so you can see that there are rare cases of 25 to 30% capital growth on the far right >> um less than 100,000 uh but they they do occur but this is only for one year so there were some subs that had growth outside these extremes like more than 30% or less than minus 20% but I I excluded those uh a to keep the chart a little bit um simpler and b I wasn't entirely sure whether they were legitimate capital growth or perhaps uh capital growth anomalies.
But the point is the most common occurrence is the tallest bar right in the middle with growth between 0 and 5% and the rest spread out with lower and lower likelihood of occurrence. Mhm. >> So the chart shows there is a wide range of growths that you can get over a single year. Uh it's not hard to find above average or below average growth over a single year. All right. So next chart, it's the same thing, but this is now 2-year growth.
So again, I searched Australiawide over the last 35 years looking at every 2-year growth period for every suburb and then I grouped them into the same 10 buckets. Now note that these uh growth rates are perom. So it's not total growth over two years, but it's growth rate over the two years. So speed of growth is measured by growth rate each year, not sum of growth. Uh and there's a trend that you'll start to notice as the growth period increases. It becomes more obvious on the next chart.
>> Uh so this chart is now showing the same thing as the last two charts except the time the growth period is four years now. So it's a little clearer now. The pattern that is starting to show up. Uh notice how less likely it is to have extremely bad growth or extremely good growth on the far left and the far right of the chart. And the next chart shows it even more clearly. So this is now showing 8-year growth periods.
So I'm doubling the growth period each time uh to quickly highlight what's going on here. Uh so the extreme left or extreme right edges uh extremely low or extremely high growth very rare over eight years. Getting above average growth over a longer time frame is getting more rare. And if you go to the next chart >> wow >> so 16 years uh it's now pretty obvious the apples and oranges phenomenon is not just fluff talk. It is real. uh not much is showing up either side of the norm which is in the middle.
Uh the vast majority of property markets have growth at a rate between five and 10% peranom. And one last chart to show uh yeah so this is now the last time that I can double the growth period. is now 32 years >> and there's practically no chance of getting long-term growth outside of 5 to 10% peranom over 32 years. Now, sorry, >> this is for a house. >> Yeah, this is for houses. >> So, it's pretty wild to think that if you can just buy like one I've said this before, if you can buy one decent investment property and your superenuation, you are going a long way to secure your financial future into retirement.
Yeah, it's a it's a good argument that you see the one on the left is 0 to 5, but there's nothing minus [snorts] 5 to zero. So yeah, if you'd bought something 30 years, 32 years ago >> or even 16 years ago, like there's a high chance that you would have been receiving at least 5 to 10% peranom. So let's say I've purchased in a market hasn't done much for the last 10 years or eight years. >> There's a good chance it is going to have a run coming up pretty soon. So yeah, you might get disheartened, bought a property, hasn't been doing much, and that's when you can do the should I sell analysis to work out, okay, well, do you sell the property? Is there growth coming up?
Because you really want to get on that uplift. An example would be people that have sold out of Darwin and now Darwin's sort of going through a boom at the moment. >> Yeah. Yeah. >> It's um >> what what is it? Um I say uh a a long time long-term covers over a multitude of ineptitude.
>> Well, this is this is a uh interesting because I hear this a lot of the time from buyers agents saying my clients that maybe haven't received capital growth over the last 3, four, five years. What's the argument? Long-term. >> Long term. Yeah. But they say longterm it'll outperform.
This data is saying longterm it'll just perform the same as everything else. >> Interesting. Yeah. So, it won't underperform, won't outperform, it'll come good. >> You'll thank me later in the 15 years time, you'll thank me for this. >> Yeah.
Once I've retired and uh sold the business. >> What I would say to those BAS would be like, "If I throw a dart, I'm sure I can outperform you." You know, that's >> or at least match >> the dart method. That's what I call it. >> The dart method. I call it the eeny meenie miny. >> You go into a consultation.
Okay. This is our strategy. They throw the dart. It'll be better than buying in the backyard in a a lot of instances. Yeah. So, uh, now there might be some experts who argue that they can find, uh, the sort of suburbs in the 10 to 15% growth rate bucket.
Um, and if you have heard some experts making such claims, I would, uh, challenge you to ask them, well, give us a list of all the areas you bought in for your clients 30 years ago, and then we can analyze that and see how they've performed. Most of them haven't even been in business 30 years ago. Um, so yeah, only a handful have been in business for for I would say more than 30 years. Uh, but I can bet you London to a brick, those the suburbs they picked 30 years ago, if they were in business that long ago, have not managed to outperform. And it's because of this data. Uh, it's missing the point.
The whole point is u data shows that there's this tendency over the long term for all markets to grow at the same rate. And we've got this little video here which just shows all of those charts and some extras. So you'll see at the top of the chart 6 years, 7 years, 8 years. The longer the growth period, the more likely it is that property markets are going to have the same capital growth rate. It gets pretty boring for the second half of this video because yeah, it's really just between zero and you'd be lucky to get 15%. >> Right.
Finishes 34 years. And you would say like maybe in those early periods if I play that video again. Let me go back one like early on you'll see like that. Let's have a look. Where is it? Here we go.
It's not playing. Oh, that's okay. It doesn't matter. I think my point is like if you go early on, if you look at those early graphs, there's markets here that have had like that negative growth over that first year. Even if you take it over like a four year period, there's markets with that negative growth, but then they start going because this is peranom. So, for example, these ones at minus 15 and minus 10 10% for that foury year period.
That's like >> going back quite significantly. the property's almost in value. But now if you look forward like >> from 4 years to 8 years they've played a lot of catchup. So maybe they've had capital growth of excess of 10 to 15 to 20% peranom to play that catch up. >> That's right. Yeah.
So when they do catch up uh over the long term they all seem to average around this you know >> five somewhere between 5 and 10%. >> Yeah. >> All right. So uh >> so small difference each year, big difference final year. >> Yeah. So you you've probably seen a chart like this, an exponential growth chart.
>> Uh the suggestion is that a slight improvement in the peranom growth rate over a long period of time uh delivers a massively better outcome. And uh no doubt the expert showing you a chart like this has promised to be able to deliver on that green curve, the higher one, not the red one. Uh if you can get just 1% better growth over a 30-year period, uh you could be millions of dollars better off due to the nature of compound growth, which is true. The problem with these curves is that they are completely fictitious. Growth like this has never happened. Not a single property market has followed either of those two growth curves.
You simply cannot find a market that will outperform by even as little as 1% over the long term. A much more typical growth curve looks like this next one. So this is the realistic growth curve. Um there are surges, there are sloths, good eras, bad eras. Uh over multiple decades there will be multiple cycles, but there's nothing really consistent about the length of each cycle, nor the degree of growth. There's nothing smooth and consistent about any market's long-term growth chart.
And on the uh next slide I show an example for two markets you may have heard of. So this chart shows a capital growth race between Sydney and Perth and the period covered is it's actually over 40 years. Now, a lot of people are are immediately drawn to the finish line in the top right, and they may conclude something along the lines of, "Oh, if you want the best long-term growth, you need to buy in a market like the market that won this race." But, uh, what is most important on this chart is not who the winner is, but what happened in the race. You'll notice the lead changed about half a dozen times. Oranges got ahead of apples until they were seen to be too expensive. Then apples caught up, possibly overtook oranges until they were now considered too expensive.
And that cycle repeats. So there's nothing unusual about this chart. I didn't pick out these particular property markets. I just picked them out because one's far east, the other's far west. Um, finding a chart that looks like this is quite common place. In fact, is actually difficult to find a chart of this length, 40 plus years, for any two markets that does not show a regular change of the lead.
So, yeah, quite often the winner of a growth race like this is the market that has had the most growth recently. And that's because price change is always higher at the right edge of a compound growth rate chart. And that's what we're looking at. So this is total percentage. We're looking at total percentage growth. So from 1980 December 1980 to what let's say 45 years ahead.
>> We're saying that let's say what Sydney has had a total growth rate percentage of what close to maybe 2 and a half thousand%. So 25 times >> over 2 and a half th000%. Yeah. >> Yeah. >> And then you've got 3,000% for Perth. But you can see you can definitely see the catch up.
So if you look from 19 maybe 1991 maybe to 97, Perth was going through a good growth run above Sydney and then Sydney from about 1998 to about 2005 and then Perth around 2004 to 2014 and then Sydney and then in recent times Perth. So it's like back and forth, back and forth. >> That's right. Yeah. And you'll see this all the time. I have looked at literally hundreds of charts of different suburbs and cities comparing them in a growth race like this and you see the same things.
The two curves diverge and then converge, diverge and converge and that pattern repeats again and again. If you're looking at 30 years, you might see four, five, six times the lead changes and that's this phenomenon of uh of the apples and oranges. One market becomes too expensive compared to the other. the other catches up sometimes overtakes and that's why there is historical data to prove that there's there's this tendency for all property markets to grow uh at the same rate. >> So what has worked houses not units >> right? Yeah.
So after saying all that if you do want to invest for the long term there are a couple of things you can do to improve your chances. So first of all buy a house not a unit because historical data has shown that houses have outperformed units. Secondly, don't buy anything new. New underperforms compared to old. Uh and don't buy near uh large trackcts of developable land because over a long period of time that land will be developed and supply is the enemy of capital growth. Um now th those are three very simple criteria.
You don't need to look at any data. If you intend to hold longterm, that's what you should do. And there are thousands of suburbs around Australia that meet these three uh criteria. Um so all this advice is going to do these three points. If you put these ad um points into practice, all you're going to do is match uh the average. You're not going to be able to outperform.
Uh the to outperform, you're going to need to to trade property. the longer you hold, the more likely you're going to get just the average. >> And then new amenities, so train stations, shops, and schools. >> Yeah. So, one interesting thing about all of this, um, over the long term, um, as a suburb gains a new amenity, uh, it may become more appealing to buyers, uh, and that might trigger a short period of above average growth. But once that amenity has been there for more than just a few years, the benefit becomes factored into the prices already and that above average rate of growth is likely to subdue.
So having favorable amenities doesn't increase the growth rate long-term, only short-term. So to get a long-term outperformance, you actually need a continual addition of favorable amenities >> and that usually happens over multiple decades. Now uh note that it is the change the change that accelerates growth. It's not the presence of an amenity, it's the change in the group of amenities that we've got. So if it's a new amenity, it may still be having its influence on uh buyers decisions uh and increasing demand having higher capital growth. But if it's been there for a long time, like a train station's been there for 50 years, then it's well and truly already factored into the price of properties there and it's not influencing things.
So that means if you do want to outperform, find outperforming markets over the long term, >> it can't be in a market that is already fully gentrified >> because how can it improve? You need to actually target markets that have very few amenities, which is the complete opposite of what these old school buyers agents will tell you. They want you to buy close to CBD where it's where it's got all these uh amenities. It's gentrified. They're the blue chip Agrade investment grade flamingo suburbs. If you are to outperform over the long term, you actually need to target the opposite end of this amenity spectrum.
>> I think an example would be like I would think of it, let's say a train station goes in, let's just maybe use Kellyville, North Kellyville around those pockets. You've got the train station near Rouse Hill and all that. It would supercharge maybe the growth. So that growth would have been consistent, would have gone through its periods, but now they've added that extra train station in and that might just supercharge that growth slightly because they've injected it. But if that train station was always there, you can't really argue because it's already priced into the actual asset. >> That's right.
Yeah. People looking to buy in the area may think, oh, we've got some public transport here that that makes it more attractive. But that's only one thing. I mean, there's loads of things on the checklist of a buyer. Like another one would be maybe let's say a main road. I don't want to buy near a main road, but it's like the growth is still going to be similar to buying in another area where it's a little bit more expensive as an example because it's already priced in.
It's >> Yeah. How long has it been a main road for? Same with beach side. Has it always been beside the beach or is it moving closer to the beach? Uh yeah. All right, let's let's wrap it up.
Um so because of the nature of compound growth no property no suburb or city can continually outperform over the long term. Eventually the price difference becomes uh so extreme that buyers look for cheaper alternatives and the data suggests that over time all properties all suburbs and even cities tend towards having the same compound annual growth rate. Now, I mentioned earlier uh that investors should focus on short-term, not the long term. Did I mention that? I hope I did. Anyway, there's an entire episode that we've got coming up.
Uh it's episode number 12, focus on on short term, which is coming up next. You were about to introduce that, weren't you? >> I was, but that's okay. You've done that. That's fine. But it'd be interesting to see actually units.
[music] Have you done this analysis for units? Cuz we're singling out houses, but maybe units is one that we do down [music] the track. Yeah. Yeah, I did only do for houses. So, yeah, it's worth having a look. >> All right, so that wraps up episode 11 of the expert busting series.
Join us next time for episode 12, long-term growth. See you in the next episode. Thanks for watching.