Newton’s 3rd Law of Motion states “for every Action there is an equal and opposite Reaction.” As much as it works in mechanics it also applies to economics.
Eight years after the negative effects of the GFC, a new set of parameters now challenge the Baby Boomer (BB) demographic. Let’s iterate the demographic facts. The average retirement age is 63 years. Impending retirees become risk averse 5 years prior to retirement which means that from the age of 58 they start to withdraw from the investment cycle. Add 58 years to the first year born BBs and that makes year 2004. For those BBs who tweaked their superannuation plans at the turn of the century have seen their not unreasonable assumptions at the time smashed by unpredictably low interest rates, falling company profits and ever diminishing dividends. That is the Action of Newton’s 3rd Law.
The BB has resorted to investing in high dividend yielding shares and rental properties. The annual profit reports of the top 20 stocks on the Stock Exchange to the end of June 2016 dropped by 17% overall. High yielding commercial properties have seen rents drop by 20-25% since the GFC. The reality is that the next set of annual reports and rent reviews could deliver another set of lower numbers which will mean less income for the retiring BB sector.
In the last 6 months, there has been a noticeable number of BBs selling long held assets. Their concern is that the trend is going to continue and therefore only get worse. There have also been examples of older people taking out reverse mortgages against their home in order to “top up” the meagre pension that is not able to support their desired lifestyle. I have evidenced two deceased estates in the last two months where this has occurred and the youngest of the two was over 85 years of age. There is nothing wrong with reverse mortgages, and if by borrowing to supplement the pension makes them happy and healthy, then their heirs should feel happy and healthier as well. It is however another example of what people will do to make ends meet. This is the Reaction in Newton’s 3rd Law.
The residential market in Adelaide is enjoying moderately buoyant times with prices increasing at approximately 5% over the last 12 months. This will probably continue but only if the balance between supply and demand favours the vendor. In certain sectors, for example 3-4 bedroom family homes, there is a genuine under-supply and this should continue for many years. What is not included in this favourable imbalance are 40 year old flats that are past their use by date and on the verge of requiring major capital inputs. The natural transition of the BB from the large family home into a smaller, more manageable retirement facility will continue over the next 15 years. First born BBs are now 70 years of age and are getting past looking after gardens and maintaining character homes that are 50% older than they are. There will come a point in the Sales Cycle where the supply of the family home of this BB demographic will overwhelm the underlying demand. The action of the BBs selling up the family home will cause a reaction in the retirement housing sector into which they wish to buy. As with every other boom over the last four decades, the supply side will always be under and prices will rise as this crescendo builds. At the moment, there is still a positive gain to be made in transitioning from the family home to a retirement home but that may not last for much longer.
Who said “what goes up must come down”? It certainly wasn’t a Baby Boomer.