BIS Shrapnel's 40% - skepticism vs historical fact (Melb...

BIS Shrapnel's 40% - skepticism vs historical fact (Melb example)
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Like many here, my first reaction to the BIS Shrapnel report, forecasting 40% over 5 years ie. 8% was of skepticism but less so when I took a look at the historical Melb data from 1965, which surprised me.

The table (below) rolling 5 year returns on property in Melbourne since 1965. In more than 2 out of every 3 years, Melbourne property owners were sitting on gains of nearly 40% over the previous 5 years (ie returns of 39.66% in .67% of those 5 year periods (29/43 x 100).

Have not read it but would assume the BIS Shrapnel forecast assumptions are along the lines of:

1 - we do not go into a long deflationary recession (BIS appear to think this is unlikely)

2 - interest rates have peaked (the next move here could be down - in the US they are going down a lot)

3 - wages will go up (that's a real key to house prices - what will happen to wages as the the measure of value, house prices in terms of average weekly earnings)

4 - growth will vary over the 5 year period, possible with no or negative growth in the short term increasing exponentially from the low point ie the bulk of the price growth could be in the last 2 or even the last of the 5 year period - most of us will have shaken our heads in disbelief over at least one legendary "bumper" years in property

(nb: a comparison with present and likely future returns on cash is also interesting).

TABLE (...sorry about formatting) OF ROLLING 5 YEAR GAINS ON MELBOURNE PROPERTY
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NB: 67% of 5 yr periods (= 29/43 x 100) have returns of 39.66% or more. .

Year - $Median - % return over 5 years
1976 35,600 194.21%
1977 38,600 166.21%
1975 27,800 135.59%
1974 25,800 126.32%
1978 41,300 108.59%
1989 132,000 90.48%
2003 295,000 90.32%
1973 19,800 88.57%
1988 109,000 83.50%
2002 260,000 83.10%
2004 311,000 78.74%
1979 45,000 74.42%
1990 131,000 74.20%
2001 225,000 71.76%
2005 320,000 68.42%
1985 75,200 67.86%
1980 44,800 61.15%
1981 55,600 56.18%
1987 89,500 55.38%
2007 105,717 55.37%
1991 127,000 54.88%
1972 14,500 54.26%
1984 69,300 54.00%
2006 342,000 52.00%
1982 57,600 49.22%
1986 82,000 47.48%
2000 190,000 47.29%
1983 59,400 43.83%
1992 125,000 39.66%
1999 174,000 33.85%
1968 10,500 29.63%
1969 11,400 29.55%
1970 11,800 25.53%
1971 12,100 24.74%
1998 155,000 23.02%
1993 126,000 15.60%
1997 142,000 13.60%
1965 9,400 13.25%
1966 9,700 11.49%
1967 9,400 10.59%
1996 131,000 3.15%
1994 130,000 -1.52%
1995 129,000 -1.53%

This table also shows that worst time to buy a house ever was 1990 (ie 5 years before the lowest rank 5 year return which is 1995).

Here is the same data in chronological order:

1965 9,400 13.25% 38
1966 9,700 11.49% 39
1967 9,400 10.59% 40
1968 10,500 29.63% 31
1969 11,400 29.55% 32
1970 11,800 25.53% 33
1971 12,100 24.74% 34
1972 14,500 54.26% 22
1973 19,800 88.57% 8
1974 25,800 126.32% 4
1975 27,800 135.59% 3
1976 35,600 194.21% 1
1977 38,600 166.21% 2
1978 41,300 108.59% 5
1979 45,000 74.42% 12
1980 44,800 61.15% 17
1981 55,600 56.18% 18
1982 57,600 49.22% 25
1983 59,400 43.83% 28
1984 69,300 54.00% 23
1985 75,200 67.86% 16
1986 82,000 47.48% 26
1987 89,500 55.38% 19
1988 109,000 83.50% 9
1989 132,000 90.48% 6
1990 131,000 74.20% 13
1991 127,000 54.88% 21
1992 125,000 39.66% 29
1993 126,000 15.60% 36
1994 130,000 -1.52% 42
1995 129,000 -1.53% 43
1996 131,000 3.15% 41
1997 142,000 13.60% 37
1998 155,000 23.02% 35
1999 174,000 33.85% 30
2000 190,000 47.29% 27
2001 225,000 71.76% 14
2002 260,000 83.10% 10
2003 295,000 90.32% 7
2004 311,000 78.74% 11
2005 320,000 68.42% 15
2006 342,000 52.00% 24
2007 403,970 55.37% 20

....and here are yearly returns;

1965 9,400
1966 9,700 300.00 3.19%
1967 9,400 (300.00) -3.09%
1968 10,500 1,100.00 11.70%
1969 11,400 900.00 8.57%
1970 11,800 400.00 3.51%
1971 12,100 300.00 2.54%
1972 14,500 2,400.00 19.83%
1973 19,800 5,300.00 36.55%
1974 25,800 6,000.00 30.30%
1975 27,800 2,000.00 7.75%
1976 35,600 7,800.00 28.06%
1977 38,600 3,000.00 8.43%
1978 41,300 2,700.00 6.99%
1979 45,000 3,700.00 8.96%
1980 44,800 (200.00) -0.44%
1981 55,600 10,800.00 24.11%
1982 57,600 2,000.00 3.60%
1983 59,400 1,800.00 3.13%
1984 69,300 9,900.00 16.67%
1985 75,200 5,900.00 8.51%
1986 82,000 6,800.00 9.04%
1987 89,500 7,500.00 9.15%
1988 109,000 19,500.00 21.79%
1989 132,000 23,000.00 21.10%
1990 131,000 (1,000.00) -0.76%
1991 127,000 (4,000.00) -3.05%
1992 125,000 (2,000.00) -1.57%
1993 126,000 1,000.00 0.80%
1994 130,000 4,000.00 3.17%
1995 129,000 (1,000.00) -0.77%
1996 131,000 2,000.00 1.55%
1997 142,000 11,000.00 8.40%
1998 155,000 13,000.00 9.15%
1999 174,000 19,000.00 12.26%
2000 190,000 16,000.00 9.20%
2001 225,000 35,000.00 18.42%
2002 260,000 35,000.00 15.56%
2003 295,000 35,000.00 13.46%
2004 311,000 16,000.00 5.42%
2005 320,000 9,000.00 2.89%
2006 342,000 22,000.00 6.88%
2007 403,970 61,970.40 18.12%