By the end of this article, you will discover I have made a prediction which is the exact opposite of what most people believe. You’ll also discover why I am happy to put my prediction in writing so that you can verify my claim in the future. Let’s check out what determines property price movements. From my observations:
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- Short-term property price movements (within 1-3 years) are usually determined by human emotion (also known as human insanity).
- Medium to long-term price movements (3-10 years or more) are more likely to be beyond human insanity, hence they are more predictable and controllable.
Can we really predict human insanity? Some Lentor Modern Price of the most intelligent people have been put to the test and still failed miserably. Economists have the unfortunate job of predicting human insanity, hence they earn the reputation of “having successfully predicted 9 out of the last 5 recessions”. What is the difference between human intelligence and human insanity? There is a limit to human intelligence. So what does determine property price movements over the medium to long-term? In my opinion, amongst many other things, property prices are predominantly determined by two factors:
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- The money supply of a nation
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- The wealth of a nation.
The money supply of a nation.
Let me explain. The money supply of a nation. Let’s take an extreme example to create a simple demonstration.
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- Let’s say on this little island country called Australia, a few thousand years ago, there were only 10 houses (probably called sheds back then), and there was no money being used at that time.
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- The island chief decides to issue some money called Australian Dollars for circulation. For the sake of simplicity, he decides that the money issued can only be used to buy properties and nothing else.
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- The island initially issues only $10, so each house is therefore priced at $1 each. (Amount of money available divided by number of houses.)
- A year later, the island decides to increase the money supply to a total of $100 still with the same usage restrictions (can only be used to buy houses). Without any improvement to the properties, each house is now priced at $10 each. ($100 divided by 10 houses, equals $10 each.)
Now you can see how property prices can go up just by increasing the money supply of a nation. We don’t even need to discuss the supply and demand situation as these only influence short-term price adjustments.If we look at the median property price in Melbourne and Sydney:
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- In the 1920s, property was priced at around 30;
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- In the 1960s, property was priced at around AUD$10,00;
- In the 2010s, property was priced at around AUD$600,000.
You know that the median priced properties are not better than those from 90 years ago when you compare their land size, location and quality of the building. But the price tag just keeps going up and up with no end in sight. This is the power of money supply increase. If you look at a graph of Australian Money Supply vs Property Prices you will see how Australia has been increasing its Money Supply at around 9% a year compounding non-stop, and how it “coincidentally” aligns with the property prices increase over the same p