#268 - Is Australia’s Property Bubble About to Implode!

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.

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