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EXCLUSIVE: A leading fund manager says 40 years of falling interest will not be repeated. The structural deflation that made Australians real estate millionaires is over. Get ready for a decade of little to no capital growth in housing.
Baby Boomers are often called an “economic miracle” of a generation. Entering the workforce in the late 1970s, they bought their first homes when interest rates were in the high double-digits. Over the life of their home loan, those rates declined, making money cheaper to use and property more expensive to buy. Simply holding a home from 1980 to 2021 made you wealthy.
But according to Milford Asset Management’s portfolio manager, Will Curtayne, the days of home values doubling every 10 years are over.
“Strong population growth increases the demand for property, but people still need to be able to afford it,” he said.
“What made them afford it was interest rates going from nearly 20 per cent back in 1980 when we last had structural inflation down to mortgage rates below 2 per cent in 2021. So that huge reduction in mortgage rates simply allowed people to borrow more and allowed house prices to grow at 8 per cent a year for 40 years. You cannot repeat that.”
Up until 2021, the housing phenomenon in Australia and New Zealand has been hugely important for shaping our economies and the way people make wealth. Unlike the United States, Australians and New Zealanders haven’t needed to become exceptional entrepreneurs or well-educated professionals to become wealthy.
“Until now, you could actually become very wealthy by working, saving young and buying house after house and leveraging it,” Mr Curtayne said.
Australian house values increased 414.6 per cent in the past 30 years, while units appreciated 293.1 per cent, according to data from Aussie Home Loans.
But according to Mr Curtayne, who runs Milford’s $1 billion Australian Absolute Growth Fund, we have gone through the turning point and are now back to structural inflation.
“That means mortgage rates will bounce around sideways and hover between 3.5 and 7 per cent over the next decade. Perhaps it stabilises at 6 per cent,” he said. “But it won’t be new lows in interest rates, and that means house price growth will basically track wage growth. There is a reset underway. House prices will go up again, but they will only go up at the same level of wage growth.”
In Australia, annual wage growth has increased to 3.3 per cent. But with inflation at double that, the buying power of Australians isn’t great. And if property prices track wage growth, even in a tight labour market, there is little room for major capital gains that Australian real estate investors have become accustomed to.
“You’re not going to become super wealthy through housing,” Mr Curtayne said.
“You won’t make that transformational wealth that people have made over the last 30 to 40 years.”
For Baby Boomers approaching retirement, the economic miracle continues. After unloading the homes they purchased 40 years ago to overstretched first home buyers, rates are at just the right level for them to make a decent return on the cash.
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