Do House Prices Double Every 7 Years?

A common myth is that house prices double every 7 years. To achieve this level of growth requires an annual growth rate of 10% per annum which is not sustainable.

One of many articles where the author states that house prices double every 7 years can be found here:

Why Melbourne’s properties will keep on rising

A few of the latest news articles in 2012 stating that Melbourne house prices are now falling can be found below which seem to contradict the article above:

House prices drop 5 per cent

NSW, Victoria post biggest drop in house prices

In this article, we will show that house prices cannot continuously double every 7 years.

Shown in the plot below are graphs each showing the effects of compounding $1 (one dollar) over 100 years at 1% to 10% p.a.

The data used to create the chart above can be downloaded in PDF format from the link below which contains the compounded growth of $1 over 100 years for annual interest rates of 1% to 20%:

Compounded Growth of One Dollar over 100 Years.pdf (32kB)

The value of $1 was selected as it allows you to determine the compounded growth on any asset over time.

From the data in the PDF above, the period that your money doubles (x2) at a given interest rate is highlighted in yellow and the period that it quadruples (x4) is highlighted in green.

Example 1 - Compounded Growth of $1 over 100 Years

If you have a house worth $100,000 back 25 years ago, you can determine it's value today assuming a compounded growth rate of 5.0% and using this chart or the raw data.

The starting value is $100,000 ($1 x 100,000) and from the raw data, after 25 years the verticle price axis shows $3.39 indicating that $1 has grown to $3.39 in that time.

Therefore, to determine the price of the house we multiple the starting price of $100,000 by 3.39 which gives $339,000 today (three-hundred and thirty nine thousand dollars).

If we were to do the same calculation above at 10.0% growth (prices doubling every 7 years), that $1 would have grown to $10.83 over 25 years, so the house would have gone from $100,000 to $1,083,000 (over 1 million dollars today).

Looking at this the other way, if a house is worth $500,000 today, it should have been worth $46,148 back 25 years ago.

Example 2 - Information from Article

Quoting from the above article, the author states the following:

"In Australia, over some 120 years or so of not quite so accurate statistics, property prices have risen at an average compound rate of 10.4%, very slightly ahead of England. Again, property prices have doubled every 7 years or so despite droughts, wars, changes of government, interstate and overseas migration, interest rate movements, exchange rate movements, changing rates of unemployment, CPI movements, etc etc."

The above states that house prices have doubled every 7 years for 120 years. If you do the mathematics on that, the $1 would have grown to $92,709 today. Even if the average house price was $1,000 back 120 years ago, it should now be worth $92,709,068 today which is almost one hundred million dollars.

Looking at this the other way, if a house is worth $500,000 today, it would have been worth $5.39 back 120 years ago if house prices did double every 7 years.

Quoting again from the above article, the author states the following:

" The result is that, for 919 years, property prices have risen at a compound rate of increase of 10.2% per annum.  The Rule of 72 states that any number which increases at 10% p.a. compound, doubles every 7.2 years.  So, for over 900 years, property prices in England have been doubling, on average, every 7 years. "

The above states that house prices have doubled every 7 years for 900 years. If you do the mathematics on that, the $1 would have grown to $17,923,245,040,000,000,000,000,000,000,000,000,000 today.

That is over 17 million, million, million, million, million, million dollars today.

Looking at this the other way, if a house is worth $500,000 today, it would have been worth $0.000000000000000000000000000000028 back 900 years ago if house prices did double every 7 years. That number is so small it should really be zero.

It is also interesting to see who wrote this article, as quoted below from the second last paragraph of the article:

"Malcolm Reid is a former Economist & Econometrician with the Reserve Bank in Sydney. He was the Economist for the Australian Post Office, Australia’s largest business undertaking, and became the first Treasurer of what is now Telstra."

Example 3 - Using House Price Indexes

If we look at the house price indexes for Australia, USA, UK and NZ and then apply 10% p.a. (house prices doubling every 7 years) compounded to 100 at June 1987, you can see the result of this in the chart below in lime green:

From the chart above, it can be clearly seen that even over 24 years of house price growth in Australia, USA, UK and NZ, house prices have not doubled every 7 years (10% p.a.).

The index of 100 at June 1987 with 10% p.a. compounded growth has grown to 985 in June 2011 which is 24 years. This can be shown mathematicaly as follows:

The above equation shows that over 24 years at 10% p.a. compounded growth, house prices should have grown by 985% if they were to double every 7 years but the data shows that this is not the case.

House Price Growth Periods at Diferent Rates

Shown in the chart below is the amount of time it takes house prices to grow at different compounded growth rates from 1% to 10% p.a.

On the horizontal axis (x-axis) is the scaling factor and on the verticle axis (y-axis) is the time period required to achieve that scaling factor for a given compounded constant growth rate (1% to 10% p.a. as shown in the legend to the right).

The data used to create the chart above can be downloaded in PDF format from the link below which contains the compounded growth of 1% to 10% up to a scaling factor of 10:

Compounded Growth at a Constant Rate.pdf (5kB)

From the chart above it can be seen that for house prices to double (2 on horizontal axis), the time required at 10% p.a. (red line) is just over 7 years (verticle axis). If you compare this to an annual growth rate of 3% p.a. (which is close to inflation) then it would take just over 23 years for house prices to double.

Another example is if we would like to know how long it takes for house prices to quadruple (x4) at an annual growth rate of 5% p.a. you can see from the chart above that this would take just over 28 years (doubling period is just over 14 years).

So How Often Do House Prices Double?

Many people are under the false impression that house prices alway go up. This is not the case as is shown in the house price index chart above where it can be seen that house prices have fallen at certains times in Australia, USA, UK and NZ but are higher than they were 24 years ago.

If house prices were to double every 10 years, this requires an annual compounded growth rate of close to 7.2% p.a. which can also be seen in the chart above.

The only country to have grown at close to 7.2% p.a. over the past 24 years up to 2011 is Australia. The UK and NZ have been closer to 6% p.a. while the USA is well below 5% p.a. and prices have gone back to their 2004 levels in 2011.

Related articles on House Prices Doubling Periods

How long does it take for your property to double in value?

House Prices Double Every Seven Years

“Property Doubles Every 7 to 10 Years”

Why invest in Melbourne

Do property values double every 7 to 10 years?

Property panic – don’t believe the hype

Notes

This page is constantly being updated and more information and analysis will be added over time.

If you know of any house in the world that has grown at this rate over these long periods, please email us. So far all we have heard is crickets.

Last updated 14th Jul 2012

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