Property is Not a Hedge Against Inflation

We’ll poke a stick at property and inflation today.

Inflation, if mixed with deflation is fine. Prices rise, then prices fall.

But inflation by itself, well, that isn’t good at all. If you look at the chart below, you can see perfectly how the value of money has been devalued almost without break for the last fifty years:

Money devalued by 99.4%


Money devalued by 99.4%


According to the Reserve Bank of Australia (RBA) numbers on Money Aggregates, the M3 money supply has increased from the equivalent of $6.7 billion in 1959 to $1.19 trillion by the end of 2009.

In other words, the value of money over the last fifty years has fallen by 99.4%. To put it another way, the equivalent of a dollar held in 1959 is almost worthless if still held today.

Now, I know it’s not likely that you’ll have kept the same currency unit in your pocket or your bank account for fifty years, but the point is, thanks to inflation your wealth is being eroded on a daily basis.

Even if we look at a shorter time period, 1990 to 2009, you can see the M3 money supply has increased from $207 billion to $1.19 trillion:

82.5% decline in 30 years


82.5% decline in 30 years


That’s a depreciation of your dollar by 82.5%. And that’s just within the last thirty years.

The reason I bring this up is to try and settle an argument we’ve scoffed at but which the property spruikers are convinced is true. That is that property is a hedge against inflation.

That if you buy a property today it will rise in line with the prices of everything else and therefore your debt will be paid off easier because of inflation and you’ll be left with a higher priced house.

Our argument has been, “Where’s the proof that inflation and property prices are directly correlated?” And furthermore, we constantly warn anyone not to believe that inflation is your friend. By itself, inflation is always your enemy.

So far, the spruikers haven’t come up with anything to back their argument. So, our only course of action is to try and refute our own argument. We’re happy to try, it keeps us on our toes.

Below is a chart we knocked together using data from the Australian Bureau of Statistics (ABS) and the Reserve Bank of Australia (RBA). It compares the index values of ‘8 Capital City House Prices’, the Consumer Price Index (CPI), and the M3 money supply:

Are inflation and house prices correlated?


Are inflation and house prices correlated?


Now, before I go into too much detail, a quick note on the dates.

You’ll see it only runs from 1986 to 2005. Just to make it clear, we haven’t cherry-picked that timeframe for any particular reason. The only reason we’ve done that is the ABS changed the index calculation for house prices in 2005 and we didn’t want to mess around with trying to marry up the two sets of numbers.

Anyway, the dates aren’t as important as the comparison of the data sets over the same timeframe.

As you’ll note, using a logarithmic scale, the green and blue lines move almost in tandem.

In index number terms, the 8 Capital City House Prices index has risen from 61.3 in June 1986 to 251.9 in June 2005. That’s a 310.9% increase.

Over the same period, the M3 money supply increased from $125 billion to $678.5 billion. An increase of 442.8% in the money supply, or a decrease of 81.5% in the value of your money.

In percentage terms that’s a pretty big gap, but on the chart, well, it’s hard to see any difference. But, as we’ve pointed out before, you can’t just put two different data sets on a chart and claim there is or isn’t a correlation.

But in this instance, whether there is a correlation or not is irrelevant. We don’t need to prove or disprove it, we can simply look at the data and draw a simple conclusion. And that is, between 1986 and 2005 the M3 money supply increased by a greater amount than the value of the 8 Capital City House Prices index.

Therefore, we can say that during that period, house prices did not provide a complete or perfect hedge against inflation.

The divergence is more obvious if we use a linear scale:

Inflation almost off the charts!


Inflation almost off the charts!


The interesting point to note is by how much the official CPI number understates the impact of the devaluation of your money.

If you just take the 8 Capital City House Prices index and compare it to the CPI then you’d be left with the false impression that property is an inflation buster.

Whereas the truth is that the CPI number masks the real story. And that is the value of the dollar has fallen to such an extent that even the so-called housing boom has failed to maintain the value of your dollars.

In fact we can go even further than that and say that between 1986 and 2004, the real price of property would have dropped as the value of your dollar fell faster than the price of homes rose.

Look, we’re sure the property spruikers won’t like that, and they’ll set their Phasers from stun to kill, but those numbers speak for themselves.

If you accept the fact that creating more money has a devaluing effect on the money already in circulation, then you must also accept that you need to take the real rate of inflation into account when valuing an asset after a specific time period.

In this case the value of the 8 Capital City House Prices index has failed to keep pace with the increase in the money supply – M3.

Of course, articles such as this one from Peter Boehm over at Yahoo! Finance prefer to use the CPI when he claims, “Combine this with a return to stable economic conditions and relatively low and stable interest rates and you have the necessary ingredients for home prices to increase well ahead of inflation.”

He’s referring to the growth rates required to make the median house prices in Sydney, Melbourne and Brisbane $1 million by 2019:

Median House Prices at $1 Million October 2019


The trouble is, by 2019, if the increase in the money supply is anything like it’s been over the last ten years, then the 117.8% increase for Brisbane will have been dwarfed by the 184% increase in the money supply:

Inflation to outpace property growth


Inflation to outpace property growth


Simply put, the increase in property prices won’t have kept pace with inflation.

We’ve heard plenty about “Property Millionaires”, yet the reality is that they don’t exist in the way the spruikers would have you believe.

What they should really be called are “Property Debt Millionaires.” $1.1 million of assets and $1 million of liabilities. Waiting for the so-called ‘equity’ in the home to increase and then withdrawing more cash to take out more debt.

Isn’t there a saying about ‘credit’ being the only difference between the hobo on the street and the majority of home owners?

So, when the spruikers talk about the median house price reaching $1 million in 2019, just remember a couple of things…

First, a million dollars in 2019 won’t be worth what a million dollars is today or ten years ago.

And secondly, if you look at the chart below:

Million dollar mortgages


Million dollar mortgages


If owner-occupied housing loans increase at the same rate as they have over the last ten years, then even though the median house price very well could be $1 million by 2019, odds are the median mortgage won’t be far behind.

The upshot is, by these numbers you can argue property prices have already fallen. But that’s only the half of it. So far, the insidious effects of inflation have meant borrowers are suffering a silent ‘debt-death’.

The realisation and the pain will be more obvious when borrowers experience an actual fall in the price of housing in dollar terms. Contrary to mainstream belief about Australia missing the housing crash, the facts are it’s likely to happen sooner than we all think.


Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

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70 Comments on "Property is Not a Hedge Against Inflation"

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I am reposting my earlier response to this article here, where it properly belongs. Hopefully Kris will see it and will address the GDP adjustment to the M3 somehow, for a more accurate picture of the relationship between property prices and inflation. Hooray!!!! In this morning’s MMA (now posted), Sayce has risen to the challenge of providing us with graphs that plot house price appreciation relative to money printing and the official inflation figures, as represented by the CPI. So, on that score, congratulations and thanks are in order. This is a very welcome and long overdue contribution to the… Read more »
I thought that these definitions of money and money supply might be useful to have pasted in here. Money is anything that is generally accepted as payment for goods and services and repayment of debts.[1][2] The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value, and occasionally, a standard of deferred payment.[3][4] Measures of money The money supply is the amount of financial instruments within a specific economy available for purchasing goods or services. The money supply is usually measured as three escalating categories M1, M2 and M3. The categories… Read more »

Over the same period of time (1986 to 2005) Gold price in A$ changed from 500 to 700 – an increase of 40%.
Source: 30-year-gold-price-history.html

What kind of hedge is that?


By comparison, from 1993 to 2004 share price of Woolworths increased by approx 400% (5 times), share price of CBA grew by 300% and share price of Harvey Norman by 1000%.
Unfortunately could not find earlier data

‘the fianancial wheel has over-run its self ,to the point of affecting even by-standers” if or this frenzied pace continues of this BS BOOM . austerity will be introduced which will affect more than just grand-parents EVERY-ONE i meet talks ABOUT PROPERTY VALUES GOING UP. everyones on the bandwagon as they say “when the bellboy starts talking shares or property,thats the time to GET OUT” its totally amazing pet dogs havent “talking” woofing ,about the value of their KENNELS going up in value also . this madness of JUST PURE GREED , will phuccc over & hurt everyone in australia… Read more »

“Over the same period of time (1986 to 2005) Gold price in A$ changed from 500 to 700 – an increase of 40%.”

Really?? I have some GOLD ETFs that are up 40% over 3 years (I know, it’s not gold but I have my reasons).

JC, have a look at the chart yourself: You will see that it was going nowhere between 1986 and 2004, then shot up. My observations are: – bank shares grew in line with property values – both property values and bank shares at that period were a better inflation hedge than gold. Especially keeping in mind that, if unleveraged, they both would give you a yield in addition to growth. – shares in a monopoly/oligopoly trading essential consumer goods were a better hedge than either (although Woolworths is more than an average ccompany) – growth in credit helped propel… Read more »

Thanks for the heads up Nick. I’m well aware of how bogus they really are, but it’s a speculative move more than anything, not wealth preservation. I’ll pull out of them in time. I’m just waiting for the roar of the approaching herd.

SV, your point is well taken and I can see exactly what you’re trying to say. Shares and bank stocks wouldn’t be what I call an “inflation hedge” though. Any old fool could have made money out of both of them.

Peter Fraser

The increase in value of property is twofold, first in the inflation of the value of the property itself, and second in the devaluation of the debt by that same rate of inflation. If in the meantime rental equals interest cost then voila you have a gain.

Thus on a geared purchase the buyer gets the equivalent of two times inflation less the net cost of borrowed monies.