Life and death issues the election campaign missed


House made of blocks, crumbling

Two of the most important issues to have been given scant attention in the election campaign are ageing and property. Even less noticed is the inter-relationship between the two. The effect of ageing on property prices will be arguably the most important financial challenge facing Australian governments over the coming decades.

The ageing of a developed country's population is one of the biggest predictors of long term economic trends — especially house prices. In a number of developed economies, property prices peak when retirees started to outnumber those in the work force (called the dependency ratio). In countries such as the United States, Britain, Spain and Ireland, property prices started to turn down when the dependency ratio turned down. The effect was especially extreme in Japan. Property prices eventually halved, although this was also because of the country's extreme asset bubble.

Australia is now in that territory, and the fear is that Australian house prices will start to follow the same path. Since about 2000, baby boomers have heavily invested in property, borrowing aggressively to do so. Land values have fallen over the last two years, but they are still at about 250 per cent of GDP, up from about 170 per cent of GDP in 2000, and 80 per cent of GDP in 1980. Residential land values are about 200 per cent of GDP.

Australian property is thus worth more than twice Australia's stock market, and a sustained downturn in prices will mean a significant loss of financial wealth. The political challenge will be to manage the different generational impacts. Over the next two decades there will be a steadily growing number of baby boomers looking to sell property as they rationalise their assets in preparation for retirement. For younger people in the work force, the trend in terms of house price affordability is likely to improve.

For the older generations, the implications are less positive. Much of their property investment has been based on negative gearing, an investment strategy that needs house prices to rise to make any sense. If prices start falling, there may be a rush to offload even more properties.

The degree of economic impact will depend on speed: if prices fall fast, the banks will come under pressure. If they fall slowly, the transition will be less painful. But even a slow fall will mean a less wealthy older generation, which will mean a greater burden on the Federal budget.

Ageing is not the only factor affecting house prices. Increasing population pressures also are critical, and the populations in Australia's major cities are expected to expand sharply. But Australia's baby boomers have punted heavily on property and they may be facing considerable financial disappointment.

The loss of financial wealth in property can be alleviated by lower rates, but with the cash rate at 2.5 per cent, the Reserve Bank does not have much room left to move. And if the international situation should cause inflation to rise in Australia, rates may rise, creating more stresses on property prices.

The once in a generation property boom is probably over. Or at least the debt-driven asset boom is; demographics may still create upwards price pressure, especially in the major cities. There has been almost no mention of this prospect by the major parties, in part because more people benefit from high property prices than are adversely affected by them. Almost a fifth of Australians aged 45–65 receive income from a property investment.

It has been left to the minor parties to make suggestions about how to manage our most important asset class. Bob Katter has argued that land supply should be freed up in Australia's mining towns to improve housing affordability. Family First is proposing a removal on urban zoning restrictions, opening the way for smaller developers by not making master planned communities compulsory, allowing more development of residential infrastructure, privatising planning approvals and not making people pay infrastructure charges up front.

A little less plausibly, Independent Senator Nick Xenophon has requested a housing summit after the election. He observes that in 1980 mortgage repayments were 17.4 per cent of family income, but are now 29.9 per cent.

What we are not going to see happen is the major parties making suggestions that threaten the country's most important investment. That means that whoever wins government will be left responding to the consequences of what happens to the property market, not preparing in advance.

David James headshotDavid James has been a business journalist for 25 years and is the author of Managing for the Twenty First Century and The Business Devil's Dictionary. He has a PhD in English Literature from Monash University.

Crumbling house image from Shutterstock

Topic tags: David James, economics, ageing, property



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Existing comments

I'm not sure about the idea that we should privatise planning approvals. However I think the reason this issue has not been considered at all the major parties is simple it's a hard truth the face of the population is getting old are on the challenges it brings economically speaking are only going to get big no one wants to hear that so no one's going to campaign on it

Tom layton | 06 September 2013  

"Family First is proposing a removal on urban zoning restrictions, opening the way for smaller developers by not making master planned communities compulsory.." Removing zoning restrictions will increase urban sprawl, and our infrastructure shortfall and debt will blow-out. There's limits to any growth, and a zero population growth policy, and immigration adjusted accordingly, will dampen dramatically the demand for housing, and the prices. Australia has enjoyed decades of heavy growth, but that time must end - as all growth eventually must, It's time for Australia's maturity, and consolidation as a nation.

Tony B | 06 September 2013  

David why did you 'speak up'so late?

Bev Smith | 06 September 2013  

Yes - property prices are creating problems but there are other factors which the author of this article does not take into account such as the decrease in real value of superannuation of the older generation. This means that the group that he is referring to now depend on the value of their real estate to even maintain a reasonable life style. If steps had been taken to ensure that the real value of the investment my generation made in our superannuation there would not be such a push on real estate values at the present. This also applies to the fact that if a serious investment had been made in developing home grown skill in the labour market the dependence on the 457 category would be less and property values would not be under the pressure they are at the present.

nick agocs | 06 September 2013  

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