The perfect storm for Property Investors!

[weg]

I think we need to look further back to the 70's for the lessons in this market.

Most people are assuming that interest rates will go down, and that during recession/downturn they will decrease.
But they decreased for the last 20 yrs during an equities boom, and the RE boom.
And even though I think we have been in recession for quite a while, the RBA will tell you that our economy is hot. They seen no hint of a recession till recently.

Based on that, like a few others here, I see much more downside potential than upside for RE prices, and a chance of much higher inflation & interest rates.

I share your overall view. Perhaps it's an age thing, and having gone through and experienced the spectum of conditions you mention.

We have just gone through a very prosperous time that I believe will not replicate itself anytime soon. I personally don't think it's economically possible.

Unemployment can go up to more usual levels and remain there for some time, interest rates can hover at higher level for long periods and the property market can stagnate after experiencing a drop.

I'm not a D&Ger, quite the opposite, but I do believe these are variations of economic conditions, that we will and do experience.

I have gone to job interviews in the past and competed with 70 other people and thought that was normal, compared to now where I compete with 0 people. And I have seen long periods of stagnant CG in my property.

I think if you position yourself right there will be a lot of opportunity. I just don't believe we are experiencing a little glitch, then back to what it was.

 

[MichaelW]

lay off the drugs vincenzo!

C'mon Stu,

That's obviously a Blues Brothers quote...

Jake: How much for the little girl? How much for the women?
Father: What?
Jake: Your women. I want to buy your women. The little girl, your daughters... sell them to me. Sell me your children.

I love that movie!

But, back on topic...

I tend to agree that it might take quite a while for prices to explode again, but I think we're not too far away from a property bottom. From there, we'll see yields continue to improve whilst vacancies remain low. Interest rates WILL fall, and the gap between interest and rental yield will close dramatically. It may even invert before people wake up to the CF+ risk free potential with all that CG upside, just like the 90's. But I personally think that there's a lot more informed investors out there nowadays thanks to the internet, and that it will not take as long for the boom to catch on this time. I stand by my 2% tipping point gap and reckon it might look something like this:

2008: Property prices flat, small falls. Rents go up 10-15%. RBA eases rates 25bp in Nov due to dropping oil prices offsetting inflation fears.
2009: Property prices flat. Rents go up 5-10%. RBA eases rates 50bp as inflation fears ease and the commodity boom softens as China acts to reign in domestic inflation.
2010: Rental yield in Sydney is now 6% and prevailing mortgage rates have fallen from their 8.8% peak in 2008 to 7.8% as the RBA eases another 25bp. The gap has closed to 2% and the tipping point is reached. The media is now talking about rents out of control against the backdrop of falling interest rates. Property prices go up 10%. In any other property environment people would yawn, except this time people were scared of massive crashes and this is a massive buy signal. The property market wakes up.
2011: Early investors enter the market. Rents up a little bit more, RBA on the sideline. Prices go up 15% and media starts to take notice with more and more reports of property on the rise. Heaps more development commences and some of the early developers are already bringing property to market.
2012: Middle majority investors move on in. Property prices jump 20% and its official that we're in a property boom. Yields are dropping because rents are flat but prices are on the rise. RBA threatens rate rises to control the economy as we're back on for a commodity boom as China has done enough.
2013: Late to the party chip in. Prices are looking toppy now as they go another 15%. RBA starts to raise rates to keep a cap on it.
2014: Property peaks and a whole heap of investors rush to buy as they are finally convinced we're actually at the beginning of a boom, even though it actually started 5 years ago. Experienced investors are watching their cash flow and LVR and stopped buying 2-3 years ago. They now move on to those cosmetic value adds to increase yield and ride out the downturn.
2015: Its all over. But that doesn't stop even more optimists jumping in late faithful that this time its different and the boom will never end. Oops.

Only kidding. Who knows what will happen. But that's as good a story as any right!

Cheers,
Michael

 

[Player]

Michael,

I like that book. It's like a prospective "dear diary" ................keep it out of the fiction pile!

 

[The Fence]

I like it Michael...!

We'll keep an eye on this post in the next 7 years won't we....

 

[Shadow]

C'mon Stu,
Only kidding. Who knows what will happen. But that's as good a story as any right!

Cheers,
Michael

Sounds good to me... that matches up pretty closely with how I believe things will pan out for Sydney...

Except I think the next interest rate cut will be even sooner... in September or October...

 

[Francesco]

...
I tend to agree that it might take quite a while for prices to explode again, but I think we're not too far away from a property bottom. From there, we'll see yields continue to improve whilst vacancies remain low. Interest rates WILL fall, and the gap between interest and rental yield will close dramatically. It may even invert before people wake up to the CF+ risk free potential with all that CG upside, just like the 90's. But I personally think that there's a lot more informed investors out there nowadays thanks to the internet, and that it will not take as long for the boom to catch on this time. I stand by my 2% tipping point gap and reckon it might look something like this:

2008: Property prices flat, small falls. Rents go up 10-15%. RBA eases rates 25bp in Nov due to dropping oil prices offsetting inflation fears.
2009: Property prices flat. Rents go up 5-10%. RBA eases rates 50bp as inflation fears ease and the commodity boom softens as China acts to reign in domestic inflation.
2010: Rental yield in Sydney is now 6% and prevailing mortgage rates have fallen from their 8.8% peak in 2008 to 7.8% as the RBA eases another 25bp. The gap has closed to 2% and the tipping point is reached. The media is now talking about rents out of control against the backdrop of falling interest rates. Property prices go up 10%. In any other property environment people would yawn, except this time people were scared of massive crashes and this is a massive buy signal. The property market wakes up.
2011: Early investors enter the market. Rents up a little bit more, RBA on the sideline. Prices go up 15% and media starts to take notice with more and more reports of property on the rise. Heaps more development commences and some of the early developers are already bringing property to market.
2012: Middle majority investors move on in. Property prices jump 20% and its official that we're in a property boom. Yields are dropping because rents are flat but prices are on the rise. RBA threatens rate rises to control the economy as we're back on for a commodity boom as China has done enough.
2013: Late to the party chip in. Prices are looking toppy now as they go another 15%. RBA starts to raise rates to keep a cap on it.
2014: Property peaks and a whole heap of investors rush to buy as they are finally convinced we're actually at the beginning of a boom, even though it actually started 5 years ago. Experienced investors are watching their cash flow and LVR and stopped buying 2-3 years ago. They now move on to those cosmetic value adds to increase yield and ride out the downturn.
2015: Its all over. But that doesn't stop even more optimists jumping in late faithful that this time its different and the boom will never end. Oops.

Only kidding. Who knows what will happen. But that's as good a story as any right!

Cheers,
Michael

For Sydney, this is a plausible RE map of the next cycle.

 

[tonyc00]

Hi

I wish that Michael's scenario was correct.

Except all analysts predict that the real estate and share markets will decline around 2011 when the bulk of the Baby Boomers start cashing out their superannuation plans.

There is ample evidence to support the projected timelines for people expected to retire. The consequences of them retiring are detrimental to both markets.

Personally I think that we have missed the last boom - the numbers are not there to support another boom - even with the baby bonus, increased immigration, encouragement to remain in the workforce - the actual numbers who are in the work force will decrease significantly from 2011 and that, unfortunately, will reduce the demand for all goods including housing.

Regards

Tony

 

[nonrecourse]

Reality check

Hi

I wish that Michael's scenario was correct.

Except all analysts predict that the real estate and share markets will decline around 2011 when the bulk of the Baby Boomers start cashing out their superannuation plans.

There is ample evidence to support the projected timelines for people expected to retire. The consequences of them retiring are detrimental to both markets.

Personally I think that we have missed the last boom - the numbers are not there to support another boom - even with the baby bonus, increased immigration, encouragement to remain in the workforce - the actual numbers who are in the work force will decrease significantly from 2011 and that, unfortunately, will reduce the demand for all goods including housing.

Regards

Tony

Ahhhh.... Tony you will now earn the title of a doom and gloom spreader with that sort of reasonable thinking If you just cross your fingers and toes and repeat there is no financial crisis it will all disappear.

There is going to be so many great deals with all the property flooding the market because of the combined demographic sesmic wave that will follow the credit meldown we are now entering.

The reality is that 20% of property investors will make money in the ten year down turn we are now entering and 80% will lose money. Its called Pareto's Law http://en.wikipedia.org/wiki/Pareto_principle

 

[tubs]

Who says that all the baby boomers will start cashing out of super anyway? What are they going to do, put it in a wading pool and go swimming in it?

They've got their house, their car all paid for. They'll keep it in the market and just live off the returns.

Its all panic for nothing.

 

[tonyc00]

Tubs

According to the ABS:

"Average superannuation savings per household are only just over $63,000.

Around 40% of households have less than $35,000 in superannuation, with the top 20% of households still only having $135,000 in super on average.

For a couple in the age group 55 to 64 who are approaching retirement the average superannuation balance is $168,000 with singles (including divorced women and men) having much less on average."

My point remains - the babyboomers will be reducing their consumption of all types of goods including plasma TV, holidays, and their IP's.

What they will not be doing is to "live of the returns" - even a 10% return on the average balance is only $6,300 per annum per household.

Check out your facts.

Regards

Tony

 

[HiEquity]

Except all analysts predict

LOL - Must be the first time "all analysts" have agreed on anything! Statements like this do nothing for the credibility of your argument...

the actual numbers who are in the work force will decrease significantly from 2011 and that, unfortunately, will reduce the demand for all goods including housing.

So let me get this right. you are relying on everyone cashing out of their super investments and putting it all under their beds? If baby boomers do this it will increase the demand for goods and services because they will need to spend it all on something...

And how does this get over the fact that, OO or renter, everyone has to live somewhere? With new construction at record lows and population growth at record highs, either increasing rents or increasing prices will be the result. This is happening now - that's all I know...

The reality is that 20% of property investors will make money in the ten year down turn we are now entering and 80% will lose money. Its called Pareto's Law http://en.wikipedia.org/wiki/Pareto_principle

As against the 80% that made money in the last ten years, and the ten years before that and the ten years before that and the (you get the drift...)

When construction of new dwellings exceeds demand from population growth, there will be problems for investors. Perth has that problem now as population growth hasn't yet caught up with the explosive growth in construction for the last ten years. Other local markets may have that problem as well but it's certainly not 80%, more like 20%. And with the stalled construction industry in Perth, the population growth won't take too long to catch up...

 

[HiEquity]

Check out your facts.

So first they were going to cash out all their assets, causing a huge oversupply and now you're arguing they have next to nothing to cash out? Keep in mind that fortunately not everyone has all their assets rolled up in super - lucky for them!

BTW if you really believe all this, why are you so highly leveraged? Sounds like you should be changing that goal statement to something a bit more conservative...

 

[tubs]

Tony

If they have so little super.....then what will it matter if they pull it out!

People have different buying habits at different stages of their lives. The baby boomers arent a wave of big spending moving through the market. There are different age groups of people who spend in different patterns, such as young people who buy consumables, then they buy a house, then they get a bit more money in their late 30s and 40s and hit their spending peak about then. Once their children leave home they often downsize and their spending habits reduce, or turn to things like medications as they age.

These spending patterns belong to different age groups, NOT one particular group as you claim. As the baby boomers move out of their current spending patterns, others will come in to take their place.

Oh, and I wholeheartedly apologise for not trawling through dozens of books and websites before posting. I didnt realise that this forum had such an academic focus to it these days.

 

[Shadow]

Hi
all analysts predict that the real estate and share markets will decline around 2011 when the bulk of the Baby Boomers start cashing out their superannuation plans.

Really... all of them? Would you mind posting links to all these predictions (or even just a few of them)?

Thanks.

 

[Bill.L]

Hi all,

The population in the 55-64 age group is about 2.5m. This would equate to about 1.25m households. At an average of $168,000 per household, that comes to a total of $210,000,000,000. I think it matters if they all tried to pull it out at once.

Luckily that wont happen. However this age group is going to retire in the next 10 years (most of them anyway). In retirement a minimum of around $25k per annum would be needed per household.

Using the averages, if there was 10% pa return from super, then on average, capital will be withdrawn as well to make up the balance. I would hazzard a guess that those with large sums in super would live off the earnings, while those with small sums in super will live mostly off capital until they can get the pension.

An average amount expected to be withdrawn from that entire age group, would be around $31,000,000,000 pa for living expenses. Considering the working population would number around 10m, and the average wage is $55k, with 9% going into super ~$5k/person, then the total going into super is $50,000,000,000.

It looks OK, until you realize that leaves only $20,000,000,000 pa for all the new floats, share issues, stockbrokers, fees and charges of funds etc, basically much less than today's figure.

bye

 

[tonyc00]

Ok

I'll try an answer most of the counter responses to my email - but not the idiotic ones.

Shadow, do a google search, and you'll find the sources. Then try an refute the argument instead of acting silly - name all of the sources? - otherwise I don't believe the argument - huh !!

Tubs, today Fujitsu Consulting issued a study in which it found nearly 60 per cent of the people surveyed did not have private health insurance and many did not know how they would pay for medical care in their old age."

"There are about 5.6 million people between 45 and 65 years of age and less than a million of those have a secure future in terms of their superannuation and their health funding," Mr North told ABC radio (today).

Ask them if they will be living off the returns on the super.

The baby boomers are THE biggest wave of consumers spending and they are slowly moving through the market (the pig in the python metaphor).

And tubs, no one asks that you "trawl through dozens of books and websites before posting" but the other forumites might want to read something which is factual - "babyboomers" and the consequences of their retirement are not a new concept to Australia/ Europe/ North America.

Hi equity, my point is that the babyboomers are currently earning, and many are earning big dollars, and spending those earnings. After retirement, that stops - abruptly.

However Mr tubs inferred that that the spending (ie consumption) would continue because they would draw down from the super - "just live off the returns".

My point about super/assets etc was to refute that baby boomers will continue spending regardless in retirement, because they will have all that superannuation/ assets.

What superannuation, I'm saying.

And if they sell the assets then that deflates the market - supply v demand

Regards to all.

Tony

 

[boomtown]

Tony

I think you make some good points.

I am also wary about the long term returns of the stock market (over 25+ years time frame) when significant liquidity will be drawn out. That being said I am ok with part of my portfolio (just not the bulk) being in the market long term.

I these demographic changes makes direct property more attractive - particularly when the property you select is multi-use but is bought keeping in mind potential appeal to retirees.

For example I dont buy 4+ bedroom houses. I dont buy places with steep stairs. I dont buy in the outer ring. I do believe that there is real value in small, well located, low fuss single level houses on flat lots. Working man's cottages if you like.

 

[MichaelW]

The baby boomers are THE biggest wave of consumers spending and they are slowly moving through the market (the pig in the python metaphor).

Tony,

Are you aware that there are more GenX than there are BBs? Just asking, as the pig in the pythong metaphor doesn't fit. Its more like a little pig (BB) followed immediately by a bigger pig (GenX) and another bigger one again (GenY).

The reason the Baby Boomers were significant as a demographic is because they were much larger that the generation immediately prior to them. They were the step change, but the GenX and GenYs are much the same size. i.e. Not another step change, but more of a maintenance of the ensuing level.

As such, the gradual retirement of Baby Boomers will have less impact on society than anticipated IMHO. They will have a significant impact on things like health care and retirement homes as they are a step change from the previous generation and will require much more to be created in this area. But GenX won't have this impact as it will already be in place having been created for the Baby Boomers and so forth for GenY.

If you extend the impact of their retirement to residential property, for example, then the demand/supply equation becomes interesting:

1. They caused a boom in property originally as demand suddenly was well beyond supply as they came to house buying age en masse.
2. Their preferred property was the large house on the quater acre block and they cemented this as the Great Australian Dream.
3. In retirement, these houses are too big for empty nesters to maintain by themselves. Whilst they would prefer to stay in their postcodes, evidence suggests they will downsize into low maintenance modern homes and age at home. They do not want to move into retirement villages.

As such, demand for houses on quater acre blocks will remain constant. Huh? OK, I'll try again... It will remain constant as the number of GenXers aspiring to these houses is constant with the number of baby boomers dieing or moving out of them. The demographics are of the same size. But demand for quality townhouse/unit developments close to lifestyle locations and allowing for aged occupation will rise dramatically. BBs outnumber their predecessors and demand for these is only starting to be felt and supply is way behind the 8 ball.

That's the main reason I am developing my MUH site in Mona Vale to a high standard finish, close to all the amenities like gym, golf course, cafe strip, restaurants, hospital and specialist medical centres, shopping, library etc etc. AND lift access to two of the three units and both are adaptable dwellings for mobility challenged occupants. I hope to profit from downsizing Northern Beaches BBs with their yap yap dogs under arm coming in from Whale Beach having sold their $2.5M properties and picking up my very convenient, high quality, low maintenance townhouses for a meagre $920K each. Then they can invest the balance and live off all that built up equity in retirement. If you want to profit from the baby boomer step change then you have to stay in front of the wave, as what comes after is much of the same in GenX and GenY.

I could run a similar argument for the ASX, but I don't think baby boomers retiring en masse will impact as significantly as touted.

Cheers,
Michael

 

[knightm]

Tony,

Are you aware that there are more GenX than there are BBs? Just asking, as the pig in the pythong metaphor doesn't fit. Its more like a little pig (BB) followed immediately by a bigger pig (GenX) and another bigger one again (GenY).

The reason the Baby Boomers were significant as a demographic is because they were much larger that the generation immediately prior to them. They were the step change, but the GenX and GenYs are much the same size. i.e. Not another step change, but more of a maintenance of the ensuing level.

As such, the gradual retirement of Baby Boomers will have less impact on society than anticipated IMHO. They will have a significant impact on things like health care and retirement homes as they are a step change from the previous generation and will require much more to be created in this area. But GenX won't have this impact as it will already be in place having been created for the Baby Boomers and so forth for GenY.

If you extend the impact of their retirement to residential property, for example, then the demand/supply equation becomes interesting:

1. They caused a boom in property originally as demand suddenly was well beyond supply as they came to house buying age en masse.
2. Their preferred property was the large house on the quater acre block and they cemented this as the Great Australian Dream.
3. In retirement, these houses are too big for empty nesters to maintain by themselves. Whilst they would prefer to stay in their postcodes, evidence suggests they will downsize into low maintenance modern homes and age at home. They do not want to move into retirement villages.

As such, demand for houses on quater acre blocks will remain constant. Huh? OK, I'll try again... It will remain constant as the number of GenXers aspiring to these houses is constant with the number of baby boomers dieing or moving out of them. The demographics are of the same size. But demand for quality townhouse/unit developments close to lifestyle locations and allowing for aged occupation will rise dramatically. BBs outnumber their predecessors and demand for these is only starting to be felt and supply is way behind the 8 ball.

That's the main reason I am developing my MUH site in Mona Vale to a high standard finish, close to all the amenities like gym, golf course, cafe strip, restaurants, hospital and specialist medical centres, shopping, library etc etc. AND lift access to two of the three units and both are adaptable dwellings for mobility challenged occupants. I hope to profit from downsizing Northern Beaches BBs with their yap yap dogs under arm coming in from Whale Beach having sold their $2.5M properties and picking up my very convenient, high quality, low maintenance townhouses for a meagre $920K each. Then they can invest the balance and live off all that built up equity in retirement. If you want to profit from the baby boomer step change then you have to stay in front of the wave, as what comes after is much of the same in GenX and GenY.

I could run a similar argument for the ASX, but I don't think baby boomers retiring en masse will impact as significantly as touted.

Cheers,
Michael

Very good points Michael, and you will do well with your development as you are targeting a great market. My only dissagreement is that I think the ASX will be more effected due to the high liquidity of stocks. I think the volatility will be high in coming years, (still with upturns as there is loads of super contributions being pumped into the market every month) and if there is a major correction in 2012-2015 then its more likely to cause panic selling with super funds converting to cash. Its not so easy to sell a property quickly.

 

[Shadow]

Hi
all analysts predict that the real estate and share markets will decline around 2011 when the bulk of the Baby Boomers start cashing out their superannuation plans.

Really... all of them? Would you mind posting links to all these predictions (or even just a few of them)?
Thanks.

Shadow, do a google search, and you'll find the sources. Then try an refute the argument instead of acting silly - name all of the sources? - otherwise I don't believe the argument - huh !!

Hi Tony. I did a Google search, and can confirm that all analysts do not in fact predict that the real estate and share markets will decline around 2011 when the bulk of the Baby Boomers start cashing out their superannuation plans.

In fact, I found many analysts and commentators who are of the opinion that property prices would be rising strongly by 2011.

There. I have refuted your argument as you suggested.

Now... about those sources you say you've got...

Shadow.