Did baby boomers make a big mistake by investing in property?
Did baby boomers make a big mistake by investing in property?; Don't expect the market to replicate the debt-fuelled boom that characterised the 1980s and 1990s
Could the baby boomers’ love of investment property end in tears? According to Reserve Bank of Australia governor Glenn Stevens, it might be time to diversify your investment portfolio.
Speaking in Adelaide yesterday, Stevens took the opportunity to warn investors about the housing market. Fears that the property market has overheated have increased recently, with the International Monetary Fund voicing concerns a few months ago and The Economist recently publishing an article that showed that Australia has some of the most overvalued property in the world.
“We perhaps have been a little bit over keen on investment property as our retirement plan,” Stevens said. “We may at some point be a little disappointed.”
The Australian property market is worth over $5 trillion and accounts for a majority of net wealth for most households. It’s fair to say that Australians love owning property and, given strong growth in recent decades, property has been a great investment for a long time.
Some of those gains have reflected savvy investment but, for the most part, the high returns to housing reflect banking deregulation during the 1980s, favourable demographics, almost 25 years of uninterrupted growth and a host of inefficient government policies designed to boost prices at the expense of affordability and productive investment.
The Australian tax system, including negative gearing, the first home owner grant and the capital gains reduction, is particularly susceptible to housing bubbles. Combined with the major banks’ preference for mortgage lending, the potential for irrational exuberance should be obvious.
The big questions right now are: have property investors gone too far? Have the banks been greedy? And are current house prices sustainable in the long-term?
The last time investor demand was this high in Sydney, it kicked off a price crash that saw real house prices decline by 16 per cent peak-to-trough. It also took a decade before prices regained their peak. It’s hardly a surprise that Stevens is a little concerned about investors.
As for our banks, mortgage lending has accounted for the entire increase in credit outstanding since the onset of the global financial crisis. By comparison, lending to businesses has actually declined over the past six years.
Loose lending by banks has recently gained the attention of David Murray and the financial system inquiry. The discussion has now shifted beyond a simple concern about household wealth towards the more important issue of systemic risk and our bank’s management of that risk (Murray must address the moral hazard in housing, July 16).
Stevens also touched on another important factor that will influence house price growth over the next few decades. Demographic shifts are set to have a large impact across the Australian economy and the housing sector will be no exception.
An ageing population will result in a significant shift in the composition of the Australian workforce, as what has historically been our largest cohort (the baby boomers) retire. Structurally this will weigh on income and real GDP growth -- points made recently by both the federal Treasury and RBA deputy governor Philip Lowe.
The real problem for ‘baby boomers’ will arise when they either decide to downsize their current home or free up wealth by selling their investment properties. Who will buy these properties? Unfortunately for the ‘baby boomers’ it will largely be the households who, by virtue of being born at the wrong time, haven't had the opportunity to accumulate housing wealth and cannot afford to buy property at existing prices.
The balance of power in the Australian economy will subtly shift away from the baby boomers towards younger and poorer households. With competition for prime real estate easing, particularly once the labour force begins to decline, there will be no need to take on as much debt or pay the housing multiples that are currently considered normal.
Even if that scenario doesn’t eventuate, the best case scenario for housing is that it simply fluctuates around household disposable income, as it has done for much of the past decade. Certainly investors shouldn’t expect the market to replicate the debt-fuelled boom that characterised the 1980s and 1990s.
An ageing population places a greater burden on the labour force to support the broader economy and will encourage a shift towards lower income growth. A recent paper by the RBA suggested that under those conditions, house prices could be overvalued by around 20 per cent (The great Australian housing rip-off, July 15).
Unfortunately when it comes to an ageing population, there is a lot of speculation. The simple fact is that the only real precedent we have is Japan and they have been stuck with 0 per cent interest rates and falling house prices for the best part of 25 years. According to The Economist, real house prices in Japan have declined by 44 per cent since 1990, in stark contrast to most of the western world.
As far as ageing populations go, Japan is decades ahead of where Australia is and it certainly doesn’t have our strong population growth or immigration intake. As such, the impact of ageing on our economy and the housing sector is unlikely to be as severe but it remains an issue that investors should factor into investment decisions.
House price growth has been strong over the past couple of years -- albeit focused in Sydney and Melbourne -- but the potential systemic risks of a prolonged housing downturn are very real. But the more interesting developments are occurring below the surface and are subtly shifting the composition of the market. The retirement of the very wealth baby boomers presents a unique challenge for the housing sector and Stevens may well be right: the ‘baby boomers’ have relied too much on investment property.
They didn't make a mistake when they bought a home to live in but they sure screwed up when they got fooled into believing property investment was a one way bet. Their Spanish counter-parts found out the hard way, as did the irish and americans and now the Chinese. Is Australia different? Of course not, it's always been 10 years behind the US in such matters.
There is only so much money to be made in any given market and when the herd all rushes in to claim their share it's an iron clad guarantee of losses.
Yep. Huge mistake. Any of the baby boomers who invested in property are suffering now and I don't have any sympathy for them.
Your baby boomer parents sure made a mistake investing in your property.
------------------------------ " ... which is that all-too-familiar dynamic in Irish life where people tell lies, cover them up and create all sorts of collateral damage, sometimes spread out over decades, and never take responsibility." - Alan Glynn
Yep. Huge mistake. Any of the baby boomers who invested in property are suffering now and I don't have any sympathy for them.
The mistakes were by those BB who were unrealistic in understanding how PI works & not get sucked in by the banks.
The reality for those who used the system wisely & understood market conditions?
I'll say this..
Bless me Father Stevens for some of us realistic BB & Gen X totally regret thir property shopping, they seem to have more financial choices in what they can do in life & don't need to worry what tommorows brings financially .
You should ask penance from those who took on more than they could afford & now suffer the gullabile property pie indigestion.An aging population however does present potential challenges on the labour stuff.
Yes there needs to be some thought into that, in have we kicked ourselves in the butt paradoxically.
I actually don't disagree with SOME of Pickerings stuff.
Newjerk? can you try harder than dig up another person's blog. My first promo was with Billabong and my name in English is modified with a T, am Perth born but also lived in Sydney to make my $$ It's Absolutely Fabulous if it includes brilliant locations, & high calibre tenants..what more does one want? Understand the power of the two "P"" or be financially challenged Even better when there is family who are property mad and one is born in some entitlements.....Understand that beautiful women are the exhibitionists we crave attention, whilst hot blooded men are the voyeurs ... A stunning woman can command and takes pleasure in being noticed. Seems not too many understand what it means to hold and own props and get threatened by those who do. Banks are considered to be law abiding and & rather boring places yeah not true . A bank balance sheet will show capital is dwarfed by their liabilities this means when a portions of loans is falling its problems for the bank.
Yep. Huge mistake. Any of the baby boomers who invested in property are suffering now and I don't have any sympathy for them.
Not yet, they are still loading up, big time. Did a calculation on one that sold round the corner recently, paid $400k for run down scank hole, needed min $30k spent on it and that would not get rid of the druggie neigbours and the constand ding dong of the adjacent level crossing. Anyway went straight on the market and took over a month to rent out, tennants have big dog and look like ferrals. rent circa $270pw so a pathetic return and my guess zero or negative cap growth. Auction was a heap of SMSF boomers (and older) going top mad to pay the highest price possible. Delusion still rules.
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