Instead of super, the next generation is likely to focus on property which will push up prices, as will a rate rise on Melbourne Cup Day.
Sometimes unexpected events can lead to surprise insights and so this week I will explain how I came to learn how the next generation is going to pour a lot more money into investment housing and why they are frightened that retirees will further crowd the market.
About the same time a note hit my desk from apartment king Harry Triguboff, chief at the Meriton group, warning that the Reserve Bank may inadvertently lift housing prices further by raising interest rates.
Every six months I enjoy getting together with other Eureka Report contributors for a discussion that is filmed and issued on DVD. I wasn’t able to make the latest session and instead had to sit down and distil my views about the future of Australia and long-term investment markets so they could be taped later.
I sat down with the video crew, aged in their thirties, and asked whether my views accorded with the investment strategies of their generation. It was immediately clear they had no interest in superannuation, my savings vehicle of choice; they would put the required minimum amounts into superannuation, invest it into equities and forget it.
The amounts the government allows to be invested in superannuation each year and the restrictions on gaining access to that money may have completely soured the next generation. They will look for other ways of accumulating the capital they will need in later years.
My crew had seen their colleagues and acquaintances lose heavily after attempting to accumulate wealth outside superannuation by margin borrowing on share portfolios. Leveraged share investments will be tarnished for a decade or so, until today’s young people have forgotten what happened in the past two years.
This group has a two-stage plan: to buy accommodation that meets their needs; then to negatively gear additional property. Like me they can see that the population is rising, which will underpin the value of residential investment and will force up rents over a period.
If my small sample is multiplied many times we are going to see a substantial rise in housing investment in the next few years. During the slump banks curtailed their lending to corporations and cut funding of more expensive dwellings.
But the banks maintained their level of funding for dwellings at the lower to middle sections of the housing market. That has provided great comfort for people in their thirties and forties, that they are not going to have the rug pulled from under them by a sharp fall in values caused by a cessation of bank funding.
One of the film crew sent me an email to explain how he sees the housing market. I am going to quote extracts from it because I think it explains how the next generation is looking at residential property investment.
“There’s a population boom headed Australia’s way. Add to that the resources and uranium sector and thus our economy is, more than ever, going to be tied to China and the rest of Asia. We are just embarking on this journey so there is no end in sight.
“My concern/belief is this: I think many young people in Australia only have about five years left until they’re completely priced out of the market and Australia’s capital cities become New York or London in style and operation.
“As middle and higher-income class retirees look for a way to invest their DIY super they’ll look for easier ways to get into residential property; this is already happening, slowly.
“When it finally dawns on the generation of Superannuation Australia that they can fund most of their retirement off the back of the rent they receive on a monthly basis – much like the pay cheque they’ve been used to all their life – rather than annual or bi-annual dividends, they’ll be diving into property like a pig in mud on a hot day.
“Not only will they have a monthly ‘rental pay cheque’ with which to wholly or partly fund their retirement, they’ll also have their money tied up in an asset class which, by governmental design, is almost guaranteed to appreciate (and is doing so now by up to 11% pa. in Melbourne this past year).
“Who out there in ‘Young Australia’ could possibly hope to outbid, for example, a 60 year old couple looking to secure their finances for the rest of their living days? We have five years at best to get set.”
One of our group added a new twist. He believes that those who managed to put large amounts into superannuation are going to use all their political clout to free some of that money for housing investment and he believes they will succeed.
The combination of housing as the preferred savings vehicles of people in their thirties, forties and fifties, and the possible addition of superannuation money to the pool, may lift housing values beyond the level of ordinary people and may turn Australia into a nation of renters. But like all investment strategies there is danger, particularly in Melbourne and Brisbane.
We are seeing state governments substantially increase the supply of housing land, which will dramatically boost the amount of housing stock on the market and will curb price rises.
But the combination of housing as the savings vehicle of choice for young people and the love affair that banks have with funding dwellings is going to maintain and increase values in the longer term. It will mean that Australian houses will be much more expensive than the US and even the UK which is a totally new development.
As it now stands, housing is a difficult investment for superannuation because it can’t be easily leveraged and the average investment in a house takes up too much of a normal superannuation portfolio. But in due course ways will be found around that problem. It is going to be important to maintain equity in housing, either through one’s residence or through investment as a significant part of your asset mix.
Let’s assume that the market is right and that interest rates are set to rise by 0.25% on November 3, Melbourne Cup Day. Officially the Reserve bank action will be taken because of inflationary worries; unofficially it will be concern at rising housing prices. The Reserve bank believes higher interest rates can curb the demand for housing.
The trouble is that, given the forces we are seeing emerging, the interest rate rises will have to be big to make any difference and the side effects of a large interest rate rise would be catastrophic.
And Triguboff’s warning is chilling. He says that if the Reserve Bank lifts interest rates it will curb the production of houses and multiply the shortages, creating even greater price rises – the opposite of what it intends. Triguboff says the Reserve bank should delay interest rate rises until the housing shortage is reduced. I don’t think his warning will stop the Cup Day rate rise but he is a remarkable judge of the Sydney market and he likely to be right.
By Robert Gottliebsen
This article first appeared in Eureka Report, October 30, 2009
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