Why our property markets are guaranteed to recover

Although immigration has slowed in recent times, the projections for our future population have many concerned about where all of these people will live, writes Michael Yardney, director of Metropole Property Investment Strategists.

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 are saying 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 that our population ageing. While ageing has been conspicuously left out of the population debate, in many ways it will provide a greater challenge for policy makers 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 and 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 10 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 global scares that didn’t eventuate, including:

The communists are coming to get us — in the 1960s
Global cooling — Yes, when I was a teenager I remember we were told the world going to end up freezing, not overheating.
The world will end because a nuclear war is imminent — in the 1960s and ’70s.
Global famine — We just weren’t going to be able to produce enough food for our growing population.
We’ll run out of petrol and fossil fuels — This was a popular theory in the ’80s and brought on a range of more fuel-efficient vehicles.
Global warming — But I’ve heard more convincing arguments against this than I have heard for it
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 1970s. And again in the early ’80s when we had a recession and in the late ’80s before our property markets flat-lined for a few years. I heard this again in the ’90s 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.

Over the years I’ve heard lots of scary predications that sounded correct, but didn’t come to pass.

What about our ageing population?

Recently, Harry Dent has caused a stir making another scary prediction. He suggested that our ageing population and their lack of spending was 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 will 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 will 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.

If we import young skilled adults to fill the increasingly wide gap in skilled labour 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.

BIS Shrapnel addressed the question of the shorter-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 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 urban environments, with the number expected to rise to 75% by the year 2050. Developing nations are set to become home to more than half of the world’s 50 largest cities. In Australia at present, 87% of us live in urban areas. With an obviously emerging trend towards 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 two main factors:

Population growth; and
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 will 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 own their homes outright, with an average value of $541,000. And about the same number have mortgages on houses worth an average of $521,000 with mortgages of $188,000.

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.

*Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. He also writes the Property Investment Update blog. This article was first published at Property Observer.