One last hurrah for property

Guys,

This article is definately worth a read. I tend to agree completely with his summary at the end and recommended actions.

Here's the link

Makes for a clear plan of attack for me...

Cheers,
Michael.

 

So Michael, are you saying you think this guy knows what is going to happen in twenty years? I think if you talk to people that have been in property for quite a long time (20 years +) they will laugh and say they've heard it all before.

Mark

 

VERY good one !!!!!
PS = Would be good to know what will happen in 3002 so I will cosider to be born one more time !!!!.

 

Here's another property article:

http://www.theaustralian.news.com.au/common/story_page/0,5744,17926998%5E25658,00.html

In short, no crash but no light yet at the end of the tunnel.

 

Sorry mate,

But Yes, I am saying that I agree with this guys 20 year projection. All I'm pointing out is that the Boomer effect is yet to play out. I reckon there's enough life left in them yet to see them fund another decent boom which will probably start in about 3-4 years time if history and economic fundamentals are anything to go by. But, after that, its anyone's guess what will happen when they start dying on mass. They're the reason we've seen these golden years of property over the last 60 years or so, and their absence from the market will certainly have implications we can only speculate at.

I'll play it by ear and watch for signals of the impact, but for now I'm thinking I'll consider divesting all my real estate assets once they've ridden out the next boom. A bit of a Kiyosaki / Buffet approach. I just reckon there's one more nice little upswing left in this market thanks to our BB friends so I'll ride that one first.

Cheers,
Michael.

 

No doubt the boomers will die out. But I'm not so sure that this island of ours will ever have less than 20 million again.. there's always immigration, and overpopulation just to our north in Indonesia.

 

Don't apologise for things that don't require an apology, especially expressing an opinion.

Why do you have this view? Do you think our population growth will not cover the passing of boomers? How did you formulate this opinion? I tend to agree with Glebe here that our population is not going to shrink, but that's just my opinion it is not based on cold, hard facts.

Yes, speculate being the operative word here. I tend to prefer not speculating. I try to use fundamentals (you know, schools, transport, etc etc) when looking at these sorts of things. Just as I don't rely on past performance for future performance (anyone that does is crazy) I also don't try to predict the future. Just because a property did 15% a year over the last 30 years doesn't mean it's going to do the same over the next thirty. Talk to people that buy for growth and they will tell you the same things over and over again ad nauseum. I personally don't see this changing. But now I'm speculating!

Why would you sell appreciating assets? Or are you convinced/feel strongly that houses are going to go nowhere forever after the next boom? If that's the case, why do you feel that way? Just curious to know.

Mark

 

I’m not going to disagree with the article or Michael, I think there's merit. We may not be able to predict future trends accurately but some of the causes are there to see now. Data available from the ABS shows a big jump in population between those aged 60 now and those aged 59, 58. I have often wondered what affect this will have in five to eight years time - I think the changes will start a little later than 2007.

Consider some recent surveys (which I can’t recall accurately) but I'm sure most here have read. Many investors in the last boom were 55+ and making their first investment in property, disappointed with superannuation, too conservative for "risky" shares, but comfortable with bricks and mortar. Even a recent survey saw younger investors leaving the market but a large number of the 55+ still considering an IP to address concerns about retirement income.

So what will the average near-to-retirement couple do in the next few years? Will they retire early or work and pay taxes longer? What will they do with their lump sums (assuming they aren’t legislated out of existence)? Will they try to beat the rush and start buying their retreats in 2008, leading to a sea change, tree change, tee change that dwarves the current shift?

I’m thinking a lot will want to give up living a commuter’s distance from the city for some fresh air. So the next boom could be the escape to the seas / trees / greens, but will we also get a fall in the industrial heartland / commuter / dormitory suburbs around the same time? At some time they will sell up their current houses and IPs to fund retirement – is this a market glut that causes the next "completely unexpected" slump? The demographics will change and the fundamental value of properties and areas will also change; just the same as the fundamental value of a listed company changes over time with the value of its product. …then, as Glebe points out, the population continues to grow and balances out this anomaly in the age-demographic pyramid, and we return to “normal”?

Instead of dismissing these predictions out of hand, perhaps we can work to consider some of the harder evidence that we have, and come up with a range of future options to see this baby boomer phonomena played out ... and maybe debate the most likely ones, or at least the more interesting ones?

I don’t know about accurately predicting 20 years forward, but looking at the age pyramid from the ABS I don't think I'll be investing in retirement villages then.

Dave

 

Mark,

I'll try and spell out my concerns by painting a possible scenario that I think might play out over the next decade or so...

OK, Baby Boomers (BBs) hold about 80% or more of the wealth in Australia today based on the ABS. They have always had a preference for property to grow their wealth which has stood them in good stead. They are now all just starting their retirement and are consuming their wealth. However, a recent survey uf BBs suggested they still think the property market is a good place for their spare cash and are still investing.

So, I think it might play out like this: BBs still have a good 10 to 20 years left in them before they keel over. They invest in property now and are the primary driver behind one more big hurrah in the Aus property market causing prices to double yet again in 5-6 years time. But that's it. After that they're cashed up to the gills and look to start spending it. They buy the luxury yacht or become grey nomads or embark on that big European holiday they've always wanted to do. They start folling off their real estate assets or using reverse mortgages to free the equity. The big thing is that they're no longer buying these properties! So, if 80% of Australia's wealth stops buying property what happens?

Now, the Gen Xers like me step into the breach and keep buying but demand is far lower than it used to be. Supply is still there as they haven't burnt down. There might be the odd bit of immigration but these guys don't have the huge amount of accumulated wealth that the BBs do so can't afford to buy property at current prices. They become your renters. Simple economics 1.0.1 suggest that a drop in demand drives the demand curve left and prices down. We see the market take a huge hit as prices plummet. The BBs don't step in and pick up the bargains as they used to in the past because they're looking at exiting their investments to fund their twilight years. In fact, they get spooked and start dumping property left right and centre to quickly get that accumulated wealth out before it vanishes. This perpetuates the cycle and property completely tanks to a level people today can not even comprehend. It returns to multiples of only one or two times annual earnings...

Just one theory but not completely out of the realms of reality.

Cheers,
Michael.

 

Okay, there's one thing (in my opinion) that is majorly wrong with that theory. To me, it completely ignores the fact that certain property will *always* be in demand.

Let's take one example suburb: Kew. Kew has some of the best private schools in Melbourne. The properties close to these schools in that area will always grow in my opinion, as there is always going to be more demand than supply for these properties.

Journalists can write all the stories they want and people can formulate all the theories they want, but it doesn't take a rocket scientist to understand that property always moves in cycles. Always has and always will.

To be honest with you, the idea that property growth will stop dead in its tracks after the boomers pass away is complete bunko. Think about this - in order for them to buy their 'sea change' properties they have to sell their current properties.

People are always wanting to upgrade. A percentage of people currently in their 20's and 30's don't wish to own property right now, but they will eventually, when they marry/settle down/have children. I'm 30 and haven't even thought about buying my own place (obviously for different reasons to most) but I do eventually want my own home.

As I've read so many times in Michael Yardney's newsletter and in articles/books written by long term property investors, well chosen property in 'in demnd' areas will continue to grow perpetually.

The boomers might be dying en masse in 20 years, but there are plenty of people coming through right behind them to pick up the properties they are leaving for a more relaxed lifestyle.

Mark

 

Mark,

All I can say is I hope you're right. But, you're missing a few key points:

1. Property has not "always gone up" and therefore considering that it "always will" is just optimism In fact, property has only really gone up strongly post WWII with the advent of the industrial revolution fuelled by fossil fuels.

2. The BBs have ridden this explosive part of human history to great effect. They have capitalised on an exploding global economy to make enormous wealth, arguably at the expense of future generations as they have now diminished the worlds fossil fuel reserves significantly.

3. The BBs made a lot of their wealth through the free market economy that was created post WWII. They used the share markets and property markets on the back of cheap global capital to generate substantial wealth. This has pushed both the share markets and property markets ever upwards in a virtuos cycle.

4. The BBs are now retiring en masse. They're finished with their wealth "accumulation" phase, and are readying themselves for their wealth "consumption" phase. Remember, these guys own 80% of Australia's wealth. That's why commentators all over the country are concerned about this demographic. They are also predicting inter-generational friction as the Gen Xers and Gen Ys feel disenfranchised at their poorer cousing lot in their own country.

So, what happens when 80% of Australia's wealth decides it doesn't want to perpetuate the virtuous circle of wealth generation, and instead decides it wants to exit all forms of investment vehicles and get spent on lifestyle instead? Seriously, what happens?? If only part of this plays out then expect property to tank. Shares might be propped up by the fact that company earnings will grow on the back of local retail expenditure, but in all likelihood we could see a global recession. Couple this with fears over the oil price and US housing bubbles and we look like we're in for a very bumpy ride over the next decade if not sooner.

The point I made in the first post was actually a positive one and its this:

"There is still time to make money on property". I believe there will actually be one more boom before we see a major wealth redistribution play out in a messy way. But, GET IN NOW, and ride the Boomers last hurrah.

I'll be acting on this knowledge in support of my personal wealth accumulation strategy. I'll also be watching very carefully for any signals that the BBs have subsequently shifted their focus from accumulation to expenditure. They're not there yet...

Cheers,
Michael.

 

Just wanna quickly jump in here and state that when I said some property 'always goes up' I meant over the long term, not that it goes up year in, year out. But y'all knew that already.

Seems to be a lot of very interesting talk about this subject over at Somersoft.

Mark

 

Michael, Mark,

Good discussion, this is really bringing out what are possibly two opposing options and perhaps the answer will lie somewhere in between. In twenty years or so things probably will even out and property may continue much as we've got used to in the last 50 years, but as Michael says, when 80% of the wealth is held by a relatively small group we're going to see some interesting changes in the next decade.

I agree with Mark that good property will always be in demand, eg Kew, but that doesn't mean a nice smooth ride up with the odd year down. Most BBs will look to sell their house to buy another, probably downshifting in size (not sure on value) and they probably want to take some profit to live off. But if they are prepared to spend any profit from their inner Sydney / Melbourne property to get it, it spells growth for seaside / golf course / tree change destinations.

Kew might stay in favour but with a percentage population shifting to lifestyle retreats perhaps a) they're prepared to sell to make their break and will drop to meet the market, b) prices drop a bit in Kew and go up along the beach, c) X and Y gen (without 80% of the wealth) say its less distance to commute and were going up market for a discount, let's move, d) demand in outser suburbs drops even more (unless you're near the water) as houses are difficult to clear. Anyway, that's my theory on the next move. The last hoorah might be the shift of the wealth to the coast, inner suburbs hold relative value, outer suburbs report the slump.

There are other moderating factors:

A lot of their 80% of the wealth is tied up in superannuation and the government is progressively slowing down the rate at which they can extract it. If their other wealth is in houses, they have limited options in realising equity to live off - so do they sell them relatively early (creating anything from a dip to a bust) and shift into shares that they can sell in smaller lots?

BBs have started realising (or they'd better soon) that negatively geared properties aren't going to be a lot of fun in retirement, and limit their investing, which may cool any market wide boom (or it'll really bust when they do work it out). So I don't know if the boom will be as big as Michael thinks.

The big question is: BBs are also going to be looking for ways to access their equity because they've got lots of time to spend money but can't take it with 'em; the question is how? Reverse mortgage? Selling and renting / leasing? This will be the inter-generational transfer of that wealth.

Comments?

Dave

 

Some excellent points there Dave. The point I was trying to make in the second last post was that there are pockets of property that will always be in demand. To say that property em masse is going to stagnate after the next boom is, in my opinion, a REALLY bold statement to make.

Like you said in the first sentence - this is really bringing out what are possibly two opposing options and perhaps the answer will lie somewhere in between - I agree with you there to a certain extent, in that I don't see my view and Michaels as being polar opposites.

Granted, I - strongly - disagree with some of the points raised, but there are certainly points in there that are valid. The one thing that really rubbed me up the worng way, and this is no reflection on Michael, but more on the writer of the article were the predictions he made re: what property is going to do 20 years from now. No one can tell you what is going to happen twenty years from now!

Mark

 

Guys,
If you want to predict what may happen in 20-30 years time, think now what you will do when you hit say 60+ years of age.
We may or may not get next boom like we had few years ago...
Also we may get the situation in Australia similar to Europe, where owning a house or apartment it's a dream to most of the people.
After all no matter who is claiming what - this is just another speculation.

 

Mark, true and I agree whole-heartedly a lot can happen in 20 years and you can't predict it, at least not accurately. But it's only about two cycles away (if you are prepared to predict the future cycles based on the past ones).

I personnaly think the next period will be different from the traditional pattern for the reasons discussed, I just wish I could work out how different! It could be that instead of going to the cost, they all migrate to inner city apartments with n yard to look after, a great view and lots of restaurants, cafe's and entertainment nearby.

If BBs are hitting their expiry date, somehow a whole heap of the nation's wealth is going to change hands in a relatively short time. And I know that there won't be much coming from mine relatives, so I need to know how to make the best of the next cycle.

Keep the ideas coming! Dave

 

Guys,

All good points, including Mark's that 20 years is a fair way off to be trying to predict. And also that history has been a pretty good indication of what the market will do for last 50 years or so...

I used to be wary of the "this time its different" camp, and still am to a large degree. The main point I was trying to raise was that, well, this time it is different.

That is, for the last 50 years of steady property growth we've witnessed in the developed world we've had the industrial revolution on the back of fossil fuels and WWII to thank for it. This has really benefited the boomers who've ridden that entire wave having been born just after the war. Now, fossil fuels are drying up PLUS the boomers are retiring or dying.

This changes the picture in two ways. Firstly, the prosperity we've enjoyed thanks to free flowing fossil fuels is arguably coming to an end. That's "arguably" coming to an end, and that's pure speculation, but when it does you'll know about it and so will your investment portfolio in a big way.

Secondly, the Boomers can't take it with them, so one way or another there is a huge wealth redistribution process about to play out. This is NOT speculation, they CAN'T take it with them! So, how's it going to happen? If you can figure that one out then you'll do well over the next 20 years or so. If not, then we'll just have to respond to any changes as we see them occur. The guy I quoted picked the sea change phenomena based on BB retirement so he's not a complete goose. He's also now saying that they'll likely be in the market for one more boom then out of it. That doesn't sound too rich to me, and the ramifications are significant.

You can put your head in the sand and try and ignore the Boomer retirement effect, but at your own peril IMHO.

Cheers guys,
Michael.

 

Scarcity and demand ?

Hi guys

Macro-(or micro-for that matter) economics is too complex for my pea-sized brain, but my faith in the future of property is based on the concept of scarcity and location.

1. If you plot the median price of property in Sydney, Melbourne and Brisbane for the last 50 years, the numbers show an accumulated growth of around 10% per annum (in fact in the last 20 years that average growth is closer to 11% p.a) (apologies to Bill Zheng of InvestorsDirect whose presentation I got that from, I don't have the exact figures) - obviously there are peaks and troughs but the trend is stable over that timeframe.

2. History is one of the better indicators of future performance

3 (a) I think economic theory says you need at least 4 tax-payers to fund 1 retiree (or something like that) and Australia is/was heading toward a 1:1 ratio which is not sustainable, thanks to the BB's
3 (b) My understanding is immigration of skilled labour on temporary working visas to address the skills shortage has reached the largest numbers ever, and continues to grow (and they need somewhere to live)
Again apologies to Bill Zheng, as his presentation mentioned figures along those lines.

4. Major shifts in economic behaviour by a group as substantial as Baby Boomers might have an impact (I guess there are plenty of Baby Boomers not sufficiently cashed up to affect the property market, other than needing a nice place to rent if they can't afford to buy), just as North Korea, the massive consumption of our natural resources in China might, or the search for 'sea change' and 'tree change' might. I'm not sure how any of this changes the fundamentals of what makes a good property ?

5. I guess if I was preparing to cash in on baby boomers and allowing them to drive my opinion of property, a safe bet might have been investing in a company like Village Life http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=au:vll&sid=0&o_symb=au:vll&x=37&y=18)
- luckily I didn't choose that one ;-)

For my (simple, life is like a box of chocolates) part I'm sticking to property with scarcity value and high proportion of land content, potential to improve, close to the CBD/schools/public transport of either Brisbane, Sydney or Melbourne, and borrowing against future equity where possible to generate income till I can afford another, a 'la Steve's presentation.

I'm not too worried my lack of understanding of the BB's future will affect the underlying value of that suggested property portfolio. The last thing in the world I would consider doing is divesting a real estate asset thinking I have just enjoyed the fruits of 'the last' boom. Too time-consuming, expensive and stressful to replace the asset later. When there are plenty of blue collar property multi-millionaires, I reckon over-analysing potential macro-economic effects on property is a bigger risk than being a bit ignorant Mind you, if it all goes pear-shaped my family and I would be happy living on a cheap bush block growing our own fruit and veges, so my Forrest Gump approach is a risk I'm prepared to live with ;-)

Cheers
Carl

 

One other thing that I got from the article is the guy's sweeping generalisation of the market as a whole. It seems to me like he's saying property en masse will go nowhere.

As we all know - there is always going to be certain property that is going to be in demand. Like TryHard said, property near schools (that is the reason why I chose Kew as an example), public transport, shopping, lifestyle etc will, in my opinion, grow - not steadily year in, year out of course, but it will continue to grow.

There are more people wanting to be close to good schools/lifestyle/whatever than there are houses for them to live in. As people leave the workforce, someone needs to take their place and promotions occur. With promotions come the desire to 'upgrade'. People want to live in nice suburbs. Frankly, unless this psychological shift changes drastically, I can't see this scenario panning out.

Having read Michael Yardney's newsletter religiously over the years, the one thing that really sticks in my mind is the well located property will always be in demand.

Mark

 

Mark, I think perhaps you have the crux of the argument there. En masse the market may end up being pretty flat, areas in demand may go up or at least hold most of their value, properties elsewhere (perhaps outer suburbs) will go down (unless sustained by immigration), and some portion of that 80% of Australia's wealth held by BBs will go somewhere... the question is where?

The definition of what is well located property has the potential to change if BBs (with the $) start pursuing the same market niches. Take Brisbane for example, the Ipswich corridor is designated as Brisbanes expansion zone, it will have the upgraded roads and all the new schools, etc, but there's miles of open land to consume so supply is high. Compare this to the coastal strip from Wynnum to Victoria Point where the amount of sea change opportunities are limited. My guess is that growth in the Ipswich corridor is limited, perhaps rising in price with the cost of building or if the release of new land faulters temporarily. But if just a percentage of the BBs head to the coast the limited supply of land desired by such a (relatively) wealthy group will create another coastal boom. On average (after inflation) the SEQ market may appear flat.

The point is that I want to find not just the areas that will rise with inflation over the next 20 years, but those that will go up. I have no intention of selling out of property, but it is not so much time in the market as finding which market to spend time in.

Dave