Happy New Year and welcome to mrd for 2010! Nick and his family are enjoying a well earned break away; so you’ll have to put up with my “ramblings” for this Friday’s newsletter – but please read on anyway!

2009 saw Australia’s largest annual population growth in history. Will this trend continue and therefore keep driving the “demand” part of the “Supply & Demand” equation?

More Room, More Room

“More room, More room” is the title of a book. The movie it inspired starred Charlton Heston and was called “Soylent Green”; some of you oldies will remember it. This film is set in the future where the world’s population has exploded and where “real” food is now just a thing of the past; available only to the rich elite. The rest of the human race have only Soylent Green to eat – a product that turns out to be recycled people! (Link to Soylent Green Review)

• Population growth ought to be of great interest to all property investors.
• Most, if not all, would agree that supply and demand has a large effect on property values.
• Population growth is a an integral part of the “demand” component.

My namesake, Martin Bell, is a professor at the University of Queensland’s Centre for Population Research. Addressing the topic of baby boomers, Brisbane’s Courier Mail newspaper recently quoted him saying that another 5.3 million baby boomers become eligible for the pension for the first time this month; January 2010. This is the first wave of a “demographic tsunami”.

Read Courier Mail Article Here

As demographer Bernard Salt said recently, “not only will the baby boomers demand more from the tax base, but they will also be coming out of the workforce and will stop paying tax.”

Professor Bell also said that the retirement of these baby boomers would also exacerbate skilled labour shortages in Australia and create planning issues for growing cities such as Brisbane. “This is an intriguing transition,” said Bell. “I’d rank it alongside the Industrial Revolution.”

The Problem

• 5.3 million more eligible pensioners
• Massive loss of tax revenue
• Massive increase to social security bill
• Massive increase in health care costs as these pensioners age
• Massive loss of skilled workers

The Solution

The obvious problem that faces the government can be addressed by one of two ways:

1. Increase the taxes paid by fewer workers or
2. Increase the number of workers who will pay tax

It’s official that the pension age in Australia is rising (and will hit 70 before too long, in my opinion – Martin Bell who is not a professor). Aside from the self-funded, Australians will have to work longer before being able to retire. Strong migration numbers to address a skills shortage and increasing the numbers in the workforce paying taxes is our current government’s policy. I cannot see a future government altering that course of action.

Bernard Salt commented the problem should be met with a big rise in migration levels, targeting young skilled workers, to boost the tax base.

“We either lift migration or we can ask Gen Y and Gen X to pay more tax per capita, and I don’t think that’s going to be popular”, he said.

The Impact

More people means more demand on housing. In my opinion, this in turn should see real estate prices continue to rise.

An article in the Courier Mail 28/12/09 headlined “Housing crisis tipped in new year as demand outstrips supply” referred to official figures from peak industry group the Urban Development Institute of Australia showing housing approvals dropped 25 per cent on average for the decade while net overseas migration – the big mover – is running at six times the rate of 1990 levels.

“A DECADE of unprecedented population growth in Queensland will leave a chronic shortfall of 50,000 houses by the middle of next year. The shortfall is likely to present the state with significant problems as demand continues to outstrip supply and first-home buyers risk being priced out of the market.”

Latest figures from the Australian Bureau of Statistics indicate around 107,000 Australian women will turn 64 next year. By 2047, a quarter of all Australians will be aged over 65 years, almost double the current 13 per cent. In the last financial year, the Government supported 2.12 million seniors with age pensions, at a cost of $28 billion. In the previous year, $24.6 billion was spent providing age pensions for 2.04 million Australians.

Like its namesake this “demographic tsunami” cannot be stopped; we just have to prepare to meet it.

I turn 60 in March and I can tell you now even when I turn 65 or 70, I won’t be one of the millions asking for a handout from the government. I have set up my own “pension fund” and chances are you too could do the same but you need to act now without procrastination.

Some time ago a friend told me this story and I thought that it had a really strong point regarding procrastination:

There was an old homeless man sitting on a park bench near a bus stop watching the world go by. He saw a bus pulling into the bus stop and looking back past the bus he saw a school boy running as fast as he could trying to catch the bus. Some passengers got off the bus and the bus pulled away just as the boy arrived at the bus stop. The homeless man said to the boy who stood there out of breath, “boy, you should have run faster”. The boy looked at the man and said, between breaths” Nah, I should have started running sooner”.

We will all grow portfolios at different rates. I managed 13 properties in seven years, I have friends who did way more than that and others who did less. Either way the thing is the sooner you start the better. I often talk to people who are “waiting for the market to stabilise” and in my experience that’s where they are years later – still waiting. Don’t “miss the bus”.

Doubling Your Wealth

Some think they can double their money by folding it once and putting it back in their pocket. Personally, I prefer to rely on the property “doubling cycle”.

If you are a regular reader you would be aware that our own, personal, investment strategy relies on property doubling over a cycle of seven to 10 years. Being conservative I personally use eight years as an average when planning my own strategy (Brisbane has historically averaged 6.8 years to double since 1970) but I have had people challenge me on that.

Many lenders are now using electronic valuation services and I thought I would check some of my properties using that same system. Each valuation estimate is rated with a “level of confidence in the result being accurate” and each reports shows the comparison sales that support the valuation results. Some have high confidence with a low anticipated variation (plus or minus) and others have lower figures.

One of my properties, a 1100 sq mt block at Annerley (5km from Brisbane CBD) with a 4 bedroom house at the back and two units at the front all on one title, had a very low confidence val showing a possible variation of 40%! Not surprising as it would be harder to value electronically and since I had to pay for every valuation  I did not go ahead with that one.  Neither did I proceed with many of my other properties that had low confidence vals showing possible variations of 18-20%. I did not consider the results as being accurate enough to warrant the cost.

However a few of my 12 investment properties had “high confidence” figures with low estimated  variations and I did pay for those reports and would like to share them with you. Remember I have always looked primarily for capital growth and still tried to maintain a reasonable rent return as a second priority.

Ryans Rd, Northgate: My first property in November 1998 and I paid $131,500 for it. Estimated val is now $349,930. 166% increase in 11 years. From memory my first rent was $140 per week and I now get $300.

Benheim St, Calamvale: In August 2001 I paid $143,200 and its estimated value is now $372,622. Interestingly enough very close to the recent val the bank did 6 months ago at $375,000. 160% increase in 8 years.  I now get $370 pw rent.

Keller Way, Thornlie: In May 2002 I paid $114,000 and estimated valuation now is $342,667 – again last bank val was $350k so it’s pretty close to the mark. That’s a 200% increase in  7.5 years. I now get $300 pw rent. I don’t believe this particular property has gone up at all in the last few years so all that growth was in the first few. However I believe the average growth will be acceptable.

Please note I have not selected these as “my best performing”, purely the ones where I was willing to pay for valuations as they were “high confidence” ones. Some of my others will have done better, some worse but I am happy with the average.

No Cash

It’s important to remember that every purchase was made without any cash; that is I borrowed the total of the property and all costs, legals, stamp duty etc. Accessing the equity created across my property portfolio does not require me selling my properties. I still  have $206,000 sitting available in a redraw facility from last time I refinanced Keller Way, for example.

Some of these like Keller Way were bought before a dramatic “boom” and I don’t expect that average of 200% increase in 7.5 years to continue. Others have yet to see a real “boom” and have seen their growth over the usual cycles. It is not a straight line graph and I always take a long term view.

Now you may not agree with this growth because these sorts of results may not be your experience. That is why where you buy is so very important. I am quite confident that the properties I have purchased have been well researched and are the “right” properties  in the “right” areas.

Time IN The Market

Some may call me “lucky” or say I just bought at the “right time”; but I disagree. I bought the right properties in the right places and timing was coincidental. Some of my properties had big jumps in value just after I purchased and some were flat for a few years. It is “time in the market” not “timing the market”. Personally looking at all the indicators’ in the market right now I think this may be the best time to buy (in the right places) since I first started investing in property in November 1998! Only time will tell.

If I can just average a seven or eight year doubling cycle then my plans work very well.

We All Want An Outcome

The real reason any of us invest in property (or any other asset class) is because we desire an outcome. Your investment decisions should lead to a better tomorrow where you have more ownership of your time and more money to spend doing those things that are important to you.

To this end, mrd provides a safe environment where you can engage, ask questions and learn… assured that we will never interpret your desire for knowledge as a license to sell you something. Our services are both complimentary and without obligation; I encourage you to put us to the test!

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Are you just starting out or someway advanced on your property investment journey? Perhaps you would like to further discuss with us those outcomes you hope a property portfolio would deliver you. Whatever your need, our property mentors are committed to supporting you in the pursuit of your financial goals.

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Happy Investing,

Martin Bell
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