I classify this blog as the most important I have written since I commenced writing newsletters in May 1987. I have been a student of the Baby Boomer (BB) demographic ever since I read a book written by Harry S Dent Jnr. in 1992 titled ‘The Great Boom Ahead’. Since the early 1990’s my long-term clients will remember my constant educational episodes that I included in my missives about the unique influence played by the BB in the property markets throughout the world. Since the first boom in 1972 there is now only 1 boom to come, that being, in the housing of retired BB’s.
No one predicted the price spike that is now occurring in residential property throughout the world. The fact that it is happening worldwide means that the cause must be global and that can only be due to COVID. The pandemic has upset the supply off all things even though demand remains a constant. Within the property market there is a massive undersupply of ‘family homes with land’ whilst there is a more balanced supply of units and apartments. What is currently occurring is unsustainable.
Storm clouds are on the horizon in many forms. For the first time in over a decade inflation is now a topic based on supply chain issues. The fragility of the world supply chain was best exampled by the constipation of the “Sewerz Canal” caused by an oversized tanker getting stuck in the mud which put an end to trade between the Orient and Europe for nearly 2 months. An undersupply in microchips has seen the price of second-hand cars boom simply because new cars (which need microchips) are in undersupply and sales are down by 30%. You can add rising energy prices due to OPEC and Russia limiting supply and moving cargo across the oceans has become impossible with shipping rates rising 4-fold in the last 12 months.
Another cloud involves China’s second largest property development company, Evergrande. The fact behind this issue is that there are an estimated 65 million vacant apartments in China some of which have been so for nearly 20 years. Most of you will have seen the video of the Chinese blowing up 15 high rise apartment blocks. If a product doesn’t have a market, then the only option is to be rid of it, rather than sacrificing the price. The problem for Evergrande is that blowing up blocks of apartments does not raise cash which they desperately need just to make their monthly payments on nearly $400 billion debt. The iron ore price has dropped by 50% and 20% of Australia’s iron ore exports go into the Chinese property market to build these high-rise blocks that are now being blown up. The ripple effect is underway.
Let us not mention the threat to Taiwan and a US Treasury out of cash.
The current economic commentary is acknowledging that world growth rates are slowing and, coupled with an inflation threat, together defines Stagflation. Reserve Banks will be reluctant to play the interest rate card as the world is up to its gills in debt and there is little tolerance to mortgage rate increases particularly in the bottom sector of the market.
So it is reasonable to suggest that the booming market for ‘Family Homes with Land’ is a result of a supply chain issue, not because there are too many buyers but because there is a significant undersupply of stock. The extra supply is currently owned by BBs. The BB can now capitalise on a property market that has increased the value of their homes by 20 – 30% in the last 12 months all because of a 1 in 100-year Pandemic.
Incentives already in place allow for up to $300,000 per spouse to be deposited as a non-contributory item into a super fund if the BB is older than 65 and the funds generated result from the downsizing process. Importantly the age limit of 65 is reducing to 60 as at 1/7/2022. It would be very easy for the Government to bring that date forward to say 1/1/2022 to allow another 5 years of the BB demographic to participate in the super fund contribution scheme and capitalise on the current high prices. If the Government really wanted to go one step further, the States could incentivise the market through eliminating Stamp Duty when BB’s transition from the oversized high maintenance family home into the apartment market.
Baby Boomers should realise that sooner or later there is going to be a major rush to downsize which will generate a potential oversupply of family homes with a resultant fall in prices. On the other hand the prices for apartments will rise particularly if it gets caught short in supplying this sudden buying surge. History tells us that always happens.
If you believe that the worst of the Pandemic is near then expect a return to some normality soon.
On almost every count I don’t see any upside that justifies Baby Boomers in not cashing in on the current boom. Let not greed influence your actions.
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