Let’s Get Some Perspective On 2015 – What’s Your Investment Time Frame?

“The best time to plant a tree was 20 years ago. The second best time is now.”
– Chinese Proverb

Perspective is something that we gain from our experiences. Thinking back on my early investing days, I would probably be best described as naïve, inexperienced, and completely unrealistic in the time frames I was operating under. I wanted to be financially wealthy, and I wanted it yesterday. However, I had to learn the hard way how to become a better investor and to learn that the markets will always extract a price from you for those learnings.Now, 20 years on, and as we put 2015 to bed, and look forward to 2016, I think it is probably a good time to step back a bit from our investing to ensure that we are working with the desired perspective and time frames we need to become excellent investors. As investors, it is easy to look back on our track record of investing success (or lack thereof) and we can all do that with 20:20 clarity.

Now, 20 years on, and as we put 2015 to bed, and look forward to 2016, I think it is probably a good time to step back a bit from our investing to ensure that we are working with the desired perspective and time frames we need to become excellent investors. As investors, it is easy to look back on our track record of investing success (or lack thereof) and we can all do that with 20:20 clarity.

What is far harder for investors to do is to be able to look forward, and make plans & decisions today, for something that may take many months, years or even decades to come to fruition.
So let’s look into the economic crystal ball and start to put a bit of long-term perspective on the Australian investment landscape.

There are many factors that will influence property prices over the years to come, including population growth, construction of new dwellings, economic prosperity, affordability, financial &/or government regulation, but they will all combine to provide an ever-shifting balance between supply and demand.

When an imbalance occurs between supply and demand, we will almost always see a price movement that corresponds to that imbalance.  For example, in 2006 and then again in 2011 tropical cyclones Larry & Yasi hit far Northern Queensland, destroying much of the banana crops.

Now, this caused an imbalance in the force if you like, for all you Star Wars fans out there. In other words, the supply chain was decimated overnight. Now given that a lot of people, myself included, still wanted to eat bananas daily, there was simply more people who desired bananas then it was possible to supply. Prices for bananas started to rise from a normal value of say $2/kg to $5/kg then $10/kg the $15/kg or more at the lowest point of the supply chain. Now because it takes between 9-12 months for the next crop of bananas to grow, prices remained high for most of this period (there was a prolonged imbalance between SUPPLY & DEMAND). However, once the new crop started to hit the market (I.e supply increased) prices started to return back to their normal values when the market remains in a balanced state between those that want to eat bananas ( i.e DEMAND) and the ability to SUPPLY those bananas.

So let’s take a little bit of a look at some of the factors that are going to affect the supply:demand ratio of Australian property over the next few decades.

1. POPULATION GROWTH

Looking globally there is expected to be 8.5 billion by 2030, 9.7 billion by 2050 and exceed 11 billion in 2100, according to a new United Nations report released in July 2015.

If we take a quick look at the chart below from the blog.id.com.au site, based on the UN data using 100 as the index, we can see that Australia is well positioned on a global stage to expand our population significantly all the way through to 2100. This should not be surprising given that Australia is a large, young, lowly populated country with a relatively low density of population, and is one of the best places in the world to live in my opinion. And if you don’t trust my opinion, Australia capital cities are frequently ranked as amongst the most Liveable Cities in the world, with Melbourne taking out the title for the last 3 years in a row according to The Economists Global Liveability Ranking.

most liveable city

The report also projected that by just 2050 the populations of China, India, Indonesia, Nigeria, Pakistan, and the United States are all expected to exceed 300 million. And with the highest rate of population growth, Africa is expected to account for more than half of the world’s population growth over the next 35 years. But before, everyone rushes off to invest in Africa, China or India let’s consider another important element of population, demographics.

Not only is it important to consider how many people there are in any area, it is also important to know what sort of age they are, their wealth, housing needs, spending habits etc. As you will see from the table above, some countries will actually go into population decline over the remainder of the century due to a combination of low natural fertility, decreased migration rates and many older nations e.g Japan, China, Greece and many other European nations suffering the effects of an ageing population.

Looking at the chart below you will see that in comparison Australia (and Victoria even more so) has a much greater number of younger & working age people than either Canada or Japan.

age structure comparison

And given the many attractions of living in Australia, we have the ability to import younger, working age people to our shores. Between 1975 and 2000, Australia had an average immigration intake of about 100,000 people p.a, in 2013-14, it was over 212,000 people (http://www.abs.gov.au/ausstats/abs@.nsf/mf/3412.0/). Looking at the chart below, you can now see that Australia has amongst the highest net overseas migration rates (per 1,000 people) in the world. This is a trend I do not see reducing markedly over the medium to long term.

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Source: C.I.A World Book

 

2. ECONOMIC GROWTH

As we can see from the chart below by the US Department of Agriculture, the United States is, and is predicted to remain, the world’s largest economy into 2030 by Gross Domestic Product (GDP).

unnamed-10

However, China is hot on its heels and may even overtake the US by as early as 2023 if we use the fairly conservative growth rates, inflation rates, and currency appreciation assumptions below.

unnamed-11

In the short term, 2016 looks to be a challenging year for the Australian economy as it continues to look for growth in the non-mining sectors of the economy. However, using the same UN data as above, and specifically looking at some of Australia’s most important trading partners we can see that Australia is well placed to take advantage of the not only growing population but also growing wealth, of both the US, China, Indonesia & India till at least 2040.

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But Australia is a big country, and has the potential to benefit from the population and demographic changes going on around the world over the next 20+ years, there will be some areas that will significantly outperform others over the longer term.

I would highly encourage each of you to read the full report, The Rise Of Victoria to see why we are very bullish on the Melbourne property market in the years ahead.

However, simply knowing something, and knowing how to position yourself to take maximal advantage if it, can be 2 different things.  Part of the skill of investing is in understanding the time frames you are working under, having a comprehensive wealth plan, and working with the best people in the business.

At The Property Mentors we think we have nailed all three, if you’d like to know more, get in touch with us!

By | 2017-11-26T02:49:52+00:00 January 1st, 2016|Property Investment|Comments Off on Let’s Get Some Perspective On 2015 – What’s Your Investment Time Frame?

About the Author:

Matt has had a long and varied career which has led him to become a highly sought after Property Mentor. Matt and his team currently have over $150 million worth of property under development, and have successfully taught hundreds of clients how to build a large property portfolio to suit their lifestyle.