What every investor needs to know about our property markets

There’s finally some good news for property investors.

We are now seeing consensus from the two major property research houses, RPData and Australian Property Monitors, that house prices have risen over the last few months in response to the recent interest rate cuts.

And the Australian Bureau of Statistics show that, whilst not spectacular, house prices rose in the last quarter, for the first time in 18 months.

And recently RBA Governor Glenn Stevens confirmed our economy is in good shape and able to weather almost anything the world’s financial markets will throw at us. At the same time he reassured us that our markets are not going to crash.

Yet there are still people in the Blogosphere predicting our property markets are going to crash.

Here’s a summary of the latest stats from the ABS and RP Data

 What’s ahead?

Of course forecasting the future of something as complex as the nation’s various property markets is difficult, as there are all manner of variables at play.

While many factors affect a country’s property prices in the short term, things like interest rates, supply and demand and market confidence; the long-term prospects for Australian property are easier to forecast because over the long-term property prices are really driven by 2 main factors:

1. Population growth and

2. The wealth of the nation.

In Australia strong future population growth is a given (as I’ll explain in a moment) and as a matter of fact, so is our increasing wealth. And this is positive news for the continuing growth of property prices.

Let’s look at these in more detail…

What’s happening to Australia’s population?

Australia’s population is estimated to be around 22,900,000 and while population growth has eased since peaking back in 2008, our population increased by over 300,000 persons last year, which means we’re still growing faster than most developed nations.

This is in part due to natural growth (we’re making more babies faster than people are dying) and we still have strong overseas migration.

The fact is Australia’s population will keep getting 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.

What about our ageing population?

Another certainty is our population is ageing. This has given overseas demographer Harry Dent the opportunity to suggest that our ageing population and their lack of spending is going to cause the next depression.

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

Dent suggests that Australia is facing its own demographic tsunami as more of our Baby Boomers hit retirement age.

Populate or Perish

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.

The problem is that 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.

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 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.

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.

With more and more of us wanting to live in the same 6 or 7 capital cities, and in fact in the same suburbs of those capital cities, our old friend the supply and demand ratio will keep pushing up the value of well located inner suburban properties.

Sure these properties will be unaffordable for some of us, who’ll remain tenants, but others will be able to afford these higher priced properties, as I don’t think that anyone would argue that as a nation Australia is become wealthier over the next few decades.

Australia is well positioned to benefit from the growth of Asia, which represents 50% of the world’s population.

We stand poised to capitalise on an economic transformation unparalleled in our nation’s history, with a resources and commodities boom capable of generating $480 billion of exports a year and creating 750,000 jobs in the next 20 years.

But there’s more to it that that…

Currently over 80% of our exports to China are resources, however looking forward China offers markets of enormous proportions for all the modern services that a developed economy like Australia has to offer. We are in a prime position to supply the world’s fastest-growing major economy with food as well as a raft of products and services.

One more thing….

If we play our cards right, Australian tourism could be boosted as we become the playground of the new rich in China, who will want to holiday in a nearby country, just as we were a preferred holiday destination of the Japanese in their heyday in the 1980’s.

According to the ANZ Bank, almost $2 trillion needs to be invested in the Australian economy for our nation to capitalise on the mining boom caused by the developing world’s march towards urban industrialisation.

While our new economy will be underpinned by mining, the benefits will flow through to the services, education, tourism and our property markets.

In summary

While there will be ups and downs and lot’s of problems ahead, we are indeed the lucky country and our economy will remain the envy of the developed world. Needless to say- a strong economy is good for our property markets.

So, if like me, you are confident that Australia has a prosperous future and at the same time our population is going to grow, this means we’ll have more people who will need property for shelter and their prosperous lifestyles will allow them to afford quality property.

This means the long-term viability of our property markets is assured.

In the short term there will be some challenges and some great opportunities so it is critical to learn from experienced and successful property investors, from someone who has already achieved what you want to achieve and has retained their wealth in the long term.