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Why our property markets are guaranteed to recover

I’m going to start with a bold statement: “our property markets are guaranteed to recover” and by the time you finish reading this article you will understand why.

But before I explain, I’d like to comment on the debate about Australia’s population growth and our nation’s capacity to house the growing number of new residents arriving on our shores. Some say we should limit immigration, while others argue that we need more skilled workers to boost our economy.

Although immigration has slowed in recent times, the projections for our future population have many concerned about where all of these people will live and how our already strained infrastructure and environment will cope.

The fact is Australia’s population will get bigger under every realistic scenario according to a report by the Centre for Independent Studies, and no matter what politicians do, population growth is going to happen. This is a certainty.

Another certainty is our population is aging. While aging has been conspicuously left out of the population debate, in many ways it will provide a greater challenge for policymakers than population growth.

In a moment I’ll discuss the implications of this for you and me as property investors, but it’s worth stepping back, taking our local conundrum and multiplying it by several billion.

On a global scale, our issues appear pretty insignificant, considering that 220 children are born into the world every minute. Last week we passed a population milestone with the birth of the world’s 7 billionth citizen.

And if there weren’t already enough concerns about the capacity for the world and its environment to prosper under the weight of all these people, it is expected that by the year 2050, the world population will be closer to the ten billion mark.

What are the implications of this massive population growth?

I know many are asking how our planet can sustain more human life, with talk of impending shortages of food and natural resources.

I don’t have any answers, in fact I don’t really understand all the implications; but I do know that over the years I have heard many similar global scares that didn’t eventuate, including:

1. The communists are coming to get us – in the 60’s
2. Global cooling – yes when I was a teenager I remember how we were told the world going to end up freezing, not overheating.
3. The world will end because a nuclear war is eminent – in the 1960’s and 70’s.
4. Global famine – we just weren’t going to be able to produce enough food for our growing population.
5. We’ll run out of petrol and fossil fuels – this was a popular theory in the 80’s and brought on a range of more fuel-efficient vehicles.
6. Global warming – but I’ve heard more convincing arguments against this as I have heard for it
7. And of course I couldn’t leave out – property prices are too high and can’t keep going up, because properties are unaffordable. I heard this in the 1970’s. And again in the early 80’s when we had a recession and in the late 80’s before our property markets flat lined for a few years. I heard this again in the nineties as well as after property markets topped out in 2003. And of course we heard this in 2008 during the GFC and we’re hearing it again now.

Yes…over the years I’ve heard lots of scary predictions that sounded correct, but didn’t come to pass.

What about our aging population?

Recently Harry Dent caused a stir making his own scary predictions.

He suggested that our aging population and their lack of spending is going to cause the next depression.

The fallout of a Baby Boom gone wrong has been witnessed in Japan, where the number of retirees escalated beyond the number of working age citizens and had a notable impact on their local economy.

This has caused some demographers to suggest that Australia is facing its own demographic tsunami as more of our Baby Boomers hit retirement age.

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:

  1. Increasing taxes for those in the workforce which would be political suicide. Or…
  2. Increasing the size of the tax paying workforce by importing younger workers.

If we import young skilled adults to fill the increasingly wide gap in skilled labour that we are experiencing, these immigrants will work for some years and, given their skills, will earn high incomes and pay more tax.”

What does the government say about all this?

In its 2010 Intergenerational Report, our Treasury, on seemingly conservative assumptions of net overseas immigration of 180,000 each year in the future, concluded that we would, in fact, have 35.9 million residents living in Australia by 2050.

Economists BIS Shrapnel addressed the question of the sorter term impact of these figures and concluded that Australia’s population will likely increase by 25% to around 28.3 million people by 2026.

Based on this analysis there will be 5.7 million new Australians within 15 years. About 55% of these will be immigrants folks and the balance due to net births.

BIS Shrapnel projects that this translates to about 2.3 million new “households”, with on average 2.5 people per household, by 2026.

What does this mean for Australia?

There is no doubt that our population growth will bring with it significant, social, infrastructure and environmental impacts.

Interestingly Professor Roger Short from Melbourne University, who at 80 has lived through a tripling of the world’s population recently explained that ”We are the most affluent and the most effluent people on earth.”

Currently more than half of the global population lives in an urban environment, with the number expected to rise to 75 per cent by the year 2050, with developing nations set to become home to more than half of the world’s 50 largest cities.

In Australia at present, 87 per cent of us live in urban areas; with an obviously emerging trend toward smaller dwellings and inner city lifestyles more of us are going to be concentrated around our major capital cities.

What will this do to property prices?

While many factors affect a country’s property prices in the short term, in the long term they are driven by 2 main factors:

1. Population growth and
2. The wealth of the nation.

As I’ve already explained strong population growth is a given and as a matter of fact so is our increasing wealth.

I don’t think that anyone would argue that as a nation Australia become wealthier over the next 15 years.

Australia is well positioned to benefit from the growth of Asia, which represents 50% of the world’s population. We have vast resources that will be required by our growing neighbours and we’re at the beginning of the mother of all resources booms.

Sure some companies and their shareholders will become richer, but so will the average Australian. On many accounts the average Australian is richer already than people living in most other countries, however some people living in Australia just don’t see that and complain and protest.

After all the latest figures from the ABS show that about 2.7 million households owned their home outright, with an average value of $541,000. And about the same number have a mortgage on their house that has the average value of $521,000 with an mortgage of $188,000. 

In conclusion:
The fact remains that as long as people keep having children and residents from other countries seek to settle on our shores, Australia will not be immune to the population pandemic that’s sweeping the world.

Rather than fight it, we need to embrace it in a positive and sustainable way.

We must also recognise the opportunity this will give us to boost our declining workforce and in turn, our country’s economic well being through revenue raised from income taxes, as well as new Australians buying goods and services. And yes, that includes property.

While property prices are in a bit of a slump at present, that’s just part of the property cycle. As the cycle moves on, and it always does, the combination of population growth and increasing wealth will underpin the strong growth of capital city property values – as they have done for decades.



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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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