by Tim Riley
Below is a bit of a summary of a few different opinions on property I have recently read and thought worth sharing. I am acutely aware of my limitations as a futurologist and my inability to predict exogenous economic shocks. So I try to read as widely as possible and learn off people who appear to be smarter than me, while recognising that everyone has some sort of angle.
To that end I’m always looking to find interesting models or methodologies for assessing the future. Over the last month or so three views I’ve seen are “The Great Depression Ahead” by Harry S Dent. “Australian Property Views & Outlook” by Craig Ferguson from Antipodean Capital Management and Residex’s John Edwards in his recent “The Housing Market’s Future” DVD.
After reviewing these fairly disparate pieces of research what I began to see was some patterns and loosely categorised the different insights into the following framework:
- Long Term (LT) insights – 5-15 years. 2015+
- Medium Term (MT) insights – 2-5 years. 2012 – 2015
- Short Term (ST) insights – 1-2 years. 2010 – 2012
I’ve tried to summarise the conclusions at the end of this post.
Harry Dent is an American. He is a former strategic consultant at Bain & Company and most of his predictions relate to the American economy but there are parallels for us because all of his insights are based on a concept called “the spending wave” which asserts that an individual’s “peak spending” is between the ages of 45 and 49. So he uses population data and demographics to predict medium and long term cycles.
He has written many books but the one I’ve read most recently is “The Great Depression Ahead – How to Prosper in the Crash Following the Greatest Boom in History”. Quite a mouthful.
What’s the essence of the case he’s making?
- Developed countries are facing many years when there will be declining numbers of people in their peak spending years.
- A multi-decade commodity price cycle is about to peak to be followed by lower prices.
- The burst bubble in US real estate will be with us for some time, and prices will fall further and longer than most people expect. He predicts an American double dip recession this year and into 2012…
- There are no new innovations waiting in the wings to drive economic growth forward. Although personally I think distributed energy (ie. solar PV, fuel cells and mini wind) may be a catalyst but not for another 3-5 years at least. But that is another story.
Now for real estate once again he is commenting on the American market, however the demographics of America is pretty similar to Australia in that both societies have a massive baby boomer generation plus the “echo-boom generation” which is his terminology for gen Y. He predicts that the banking crisis and depression cycle will very likely come in 3 stages:
- the severe downturn and bubble collapse into late 2012 and 2013.
- an interim boom and rally from mid 2012 to 2017.
- a less severe slowdown and deflation cycle from mid 2017 into 2020.
His summary is that there will be extremes of the real estate spectrum that will bring opportunity post the American real estate depression:
- The first will be affordable apartments and starter homes for the new echo-boom generation, especially around mid 2011 and beyond. Affordable rental apartments should hold up the best initially. More young households will be foreced to rent furst and this rental cycle is still on the rise demographically into 2017.
- Affordable starter homes will be the first great opportunity starting mid-2011 to late 2012 for home builders and young buyers given a rising demographic cycle into around 2022.
- Vacation/retirement homes will be the next to rebound between 2012-2013 due to a baby boom cycle that doesn’t peak until 2025.
- Larger homes and McMansions may first resurge around 2013 or 2015 and then boom more sustainably from around 2020 onwards.
- He also predicts there will continue to be pockets of growth due to migration trends throughout the US.
His views on Australia?
Australia is headed for an economic plateau in 2010, but instead of declining it will flatten for a decade before moving up again into 2035 and then start a mild long-term decline.
Australia’s current “innovation wave” (the number of 20-24 year olds in the economy. The innovation wave tracks the number of people in the ecoomy who are at their most creative point – the young adults just entering the workforce out of college. They are the ones that bring new lifestyle trends and technology breakthroughs that will increase productivity) peaks around 2015 and then declines, rising again only slightly from 2025 into 2050.
This shows Australia should fare better in the slowdown during the 2010s. So whether or not his predictions are right or not, his concept of “peak spending” makes a lot of sense to me. Markets are after all over and above everything else, a function of human behaviour.
- Long Term (LT) insights 2015+: Best growth from larger homes & McMansions
- Medium Term (MT) 2012 – 2015: Best growth from vacation & retirement homes
- Short Term (ST) 2010 – 2012: Best growth from affordable apartments and starter homes
Craig Ferguson from Antipodean Capital Management
I’ve never heard of Craig Fergusion. Or Antipodean Capital Management. However in Febuary 2010 they published an “Australian Property Views & Outlook” paper. They admit they are not housing experts. However I liked their approach. And I like the fact they are not property experts. Rather they focus on equities and provide general financial product advice regarding FX markets to wholesale investors only. So there is nothing
in it for them to spruik property.
- Global Trends – Using 6th Annual Demographia International Housing Affordability Survey & data from The Economist, their main insight is AU property is severely unaffordable when compared with major OECD property markets.
- Mortgage Stress – Using Fujitsu Consulting November Report and info from globaleconomicanalysis.blogspot.com they assert mortgage stress has risen quickly in Q3-4 2009 and will only increase into 2011.
- Demand & Supply – Using ANZ Investment Bank Property Research they conclude there is a huge supply shortage looming, Supply would need to rise 100-150% from current levels to meet demand
- Debt Dynamics – Citing Professor Steve Keen UWS, ABS, RBA they assert that the last 20 yrs has been debt fuelled – it cannot last, and must normalize at some stage
- Regulatory Response – they think the US regulator response to their housing crisis was poor at best. That makes them wary AU regulators are complacent. At present the demand/supply story is holding sway, with less thought of debt dynamics. Fear of substantial prices rises is high with social & bubble implications front of mind.
They assert that supply side policy responses are needed to avert what would normally be a price explosion due to underlying demand/supply imbalance. We’d expect such a response within 1-2 years, but failure to implement would lift the lid on RBA Cash rates and the AUD far further than markets currently forecast or expect.
- Long Term (LT) insights 2015+: Debt reduction dynamic begins & price growth slows
- Medium Term (MT) 2012 – 2015: Very strong demand/supply imbalance story underpinning property prices. Predicts 15-25% capital growth. Look for broad scale land release program & high density plan in every major capital. Production of a huge amount of apartment living.
- Short Term (ST) 2010 – 2012: Aus economy should be enough to sustain property confidence and price increases. Predicts 10-15% capital growth before rates slow growth to crawl in 2011
Overlaying their predictions are exogenous regulatory and policy risks, which are required for forecasts to play out. If they do not, then the risk clearly would be for MT demand/supply dynamics to dominate and drive greater than expected price gains. So they think on balance their is upside risk in their predictions.
Please email me if you would like a copy of the report. Happy to share…
Residex – John Edwards
John Edwards was an economist at Nab and left to become the founder and CEO of Residex in 1990. I’m a bit biased because I’ve worked with him in the past, but I respect his views. Recently bought and watched a Residex DVD called “The Housing Market’s Future Revealed.” The highlights I’ve listed below:
- There is an affordability problem which must limit the price growth and it can only get worse. This should result in rental increases. 50 years ago Australia had similar suply side issues and rental yields got as high as 22-23% until govt introduced rent control in 1949.
- Strategy should be to invest in affordable areas and select property that will be desired by tenants. Result will be reasonable capital growth and good rental returns. They stressed how important focusing on affordable properties is.
John Edwards ranks the best opportunities in order as:
- Melbourne – growth in popn and more affordable
- Sydney – unaffordable, severe shortage and likely govt change
- Hobart – very affordable, retirement with cash, but risks
- Brisbane – resource state with diversified economy
- Adelaide – perhaps the next big growth are if uranium becomes in high demand
This was predicated on a state by state analysis based on the following criteria, i) political stability, ii) economic performance, iii) industry and employment, iv) popn growth and chage, v) housing market and vi) climate change.
Capital growth predictions for next 3 -5 years.
Below are the Residex computer model predictions based on historical data for houses and units. John Edwards though questions his model’s predictions on units based on the fact that they are based on historical data and that the dynamics of the current market (particularly in relation to affordability) means that unit prices have to rise. So he thinks the predictions below are on the low side. Once again he reiterates that well positioned and affordable small blocks of units will probably return better capital growth than houses because of affordability.
Interestingly for houses their 3 year %p.a prediction for Melbourne is 5.13% and 5.74% for their 5 year %p.a prediction. This is straight out of their computer model which is based purely on historical data. And more interestingly there is no where in Australia that their models are predicting huge capital growth rates. The 5 year %pa the best areas are Sydney (5.19%), Melb (5.74%), Hobart (5%), Tas country (5.5%). Australia overall is 3.08%. Perth and Darwin are predicted to go backwards!
5 year %pa for units: Hobart 4.79%, Melbourne 5.06%, Perth -2.93%, Sydney 1.96%, Australia 1.14%. Melbourne is the standout by far along with Hobart units.
- Long Term (LT) insights 2015+: none
- Medium Term (MT) 2012 – 2015: Per annum growth predictions for Houses – Sydney (5.19%), Melb (5.74%), Hobart (5%), Tas country (5.5%) & Units – Hobart 4.79%, Melbourne 5.06%
- Short Term (ST) 2010 – 2012: Focus on Melb units – growth in popn and more affordable.
So to distill all this down to a single conclusion it seems that these three different sources are saying:
- there will be constrained growth in property in the short to medium term, and
- you are more likely to get capital growth if you focus on affordable units/apartments, particularly in Melbourne and Sydney.
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