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A Demographic Tsunami Will Hit Our Property Markets

Only a few days ago I was chatting with a friend, and as usual the topic turned to property. He asked me – “Why do you think you are right? How can properties keep rising in value with lower affordability and rising interest rates?”

I started to explain how our changing demographics and our strong population growth are two of the fundamentals that I see underpinning our property prices, to which he interjected:

“Our population can’t keep increasing at this pace either! Where are we going to put all those people? What about our water shortages? Our infrastructure won’t cope!”

It’s interesting how talking about property values, affordability and population growth can lead to a heated discussion.

I told him we are in store for a demographic tsunami, a term I must attribute to Professor Martin Bell, from the University of Queensland’s Centre for Population Research, who was quoted in the Courier Mail.

He said, “Australia is on the crest of a demographic tsunami, with the first wave of 5.3 million baby boomers eligible for the age pension…”

“I’d rank it alongside the Industrial Revolution,” Professor Bell said. “It’s that kind of transition in the nature of Western society – from a young, rapidly growing population, which is broad at the bottom and thin at the top, to one that is almost the other way round.”

A pretty profound statement!

So how will this affect our economy and more particularly our property markets?

To me the conclusion is inescapable… we are going to have to populate or perish.

Look at the facts…today 43% of our workforce is made up of Baby Boomers (people born between 1945 and 1964).

This means the first wave of the tsunami has hit, as the first Baby Boomers are now turning 65. Over the next 15 years, Australia’s 5.3 million Boomers are going to reach retirement age and as they leave the workforce they will stop paying tax, many will go on the pension and most use our public health care system.

You see…most Baby Boomers don’t have enough savings or superannuation to see them through retirement.  This means many will have to keep working longer than they had anticipated but eventually, when they do retire, they place a massive burden on our financial system.

The Governments will have to find the money for their pensions and health costs while at the same time making up for their lost taxation revenue by either:

  • Increasing taxes for those in the workforce which would be political suicide.

Or…

  • Increasing the size of the tax paying workforce by importing younger workers.

Despite the rhetoric from the Opposition and Kevin Rudd appointing a population minister, there is really no choice – we have to significantly increase our population.  If you want to see the alternative just have a look at what has happened to countries with an ageing population – like Japan, Germany and to some extent America.

The new waves of growth have already started flowing onto our shores.  Australia’s population increased by 2.1% over the last 12 months – double the world average of 1.1%. And some estimates suggest that our population will increase by 60% in the next 40 years. With net overseas migration currently running at close to 300,000 a year, our population could even be significantly higher as Treasury has used a 180,000-a-year net overseas migration estimate to reach its population projection of 36 million by 2050.

I’ll discuss this a bit more, but first let’s see where we are today.

Only a few weeks ago the Australian Bureau of Statistics said there were 22,066,000 of us in September last year – an increase of 451,900 over the previous 12 months. And that two-thirds of that growth – 297,400 people – was due to immigration.

According to RP Data, over the 12 months to June 2009 the states that recorded the greatest growth in population were: New South Wales (119,534), Queensland (116,533), Victoria (116,250) and Western Australia (68,077).

Most of these people are moving to our capital cities, not regional Australia and this means the population of Melbourne Sydney and Brisbane could each grow by over 1 million people in the next 10 years.

If you break the numbers down, this means around 1,700 people a week are moving into Melbourne and similar numbers are moving into Sydney and Brisbane.

Remember…all these people need to rent or buy a home. And most of the newcomers will want to live in our inner and middle ring suburbs – near schools, hospitals, work and infrastructure.

Where are we going to put them all? Clearly we’ll need more medium density dwellings.

No wonder there is all this discussion about how we can cope with this type of population growth and whether we should allow it.  There is no doubt that this substantial increase in population will bring with it many social, political, infrastructure and environmental concerns, but the end result is inevitable.

We have no choice. In the words of a famous Prime Minister – we must populate or perish. Our population will have to grow significantly and this will have a massive impact on our property markets. One of the interesting statistics our research at Metropole has turned up is that that 30% of the dwellings needed by 2030 have not been built yet.

The fact is the value of properties around Australia will increase significantly, as will rents. But as always some properties will outperform others – those close to the centre of our capital cities, or infrastructure and amenities are likely to outperform.

For years the Baby Boomers drove the property markets so another interesting question to ponder is; with around 150,000 Boomers retiring each year (which equates to somewhere between 75,000 and 100,000 households, most with only one or two people), what will be their preferred style of accommodation? I will leave that for a future market update, but understanding the type of property that will be in continuous strong demand in the future will help you become a successful investor.

The future is bright for property investors and I’ll keep you up to date with the changes happening in our property markets in future newsletters, but it is probably appropriate to remind you that in changing times like we are experiencing, no one can help you quite like the independent property investment strategists at Metropole.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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