Australia’s property challenge is your investment opportunity

projected population growth

Every few years The Economist magazine writes a story about how property in Australia is overvalued compared to other countries – or something to that effect. Comparing Australia with other countries is like comparing apples and oranges. Australia is just so different. But this difference creates opportunities for investors that play the long game. Let me explain.

Big country and not enough taxpayers

I recently spent a few weeks travelling around France. It is so easy to get around. Its roads are in very good condition and the trains are fast, efficient and on-time.

It is easy to overlook that France would fit into Australia 14 times and its population is over 3 times more than Australia (25 million versus 76 million people). On average, there are 122 French people per square kilometre of land. In Australia, it’s a measly 3 people per square kilometre (and in the USA, 33 people).

In Australia, we have too much land and not enough taxpayers to fund the construction and maintenance of adequate infrastructure. Therefore, in order to access good schools and universities, diverse employment opportunities, health facilities, amenities and lifestyle benefits, you must live close to or in a capital city. That’s why 60% of Australia’s population live in either Melbourne, Sydney, Brisbane or Perth.  Whereas only just over 3% of France’s population lives in Paris. Living outside of Paris (in say Lyon or Toulouse) isn’t a big disadvantage. (BTW, I haven’t selected France for any particular reason – just using it as an example)

Australian federal and state governments have tried to promote regional centres such as Newcastle and Wollongong in NSW or Geelong and Bendigo in Victoria to take pressure off capital cities. However, they just cannot compete with the large capital cities.

Only solution is a massive infrastructure spend

In my opinion, the only way the Australian government will solve the housing affordability challenge is through embarking on a massive infrastructure spend. Improved public transport, fast trains, better roads are some of the things that Australia needs. Essentially, they need to make it easier to live 30km to 100kms away from the CBD by reducing travel times.

For example, trains in France travel at speeds of up to 300km per hour. That means a train could travel from Melbourne to Geelong in approximately 16 minutes. Houses are a lot cheaper in Geelong compared to Melbourne – you can buy a large family home in a good suburb for under $1 million.

However, as noted above, Australia just doesn’t have enough taxpayers to fund this very costly infrastructure.

Australia has over $150bn invested in the Future Fund. These monies were quarantined to cover unfunded government superannuation liabilities – but the government has indicated that it doesn’t intend on drawing from the Fund for at least another 6 to 7 years. This means it will accumulate even more surplus monies (it currently has $14bn of surplus monies). Arguably, the government could draw on these funds to invest in Australia’s future (i.e. infrastructure projects) – preparing us for the next two to three decades i.e. let’s plan for the long term!

In any case, Australia’s geographical and infrastructural challenges are complex and very costly to solve. Australian governments have a long history of not planning for the long term and building outdated infrastructure (think NBN) So, I’m not optimistic of this challenge being addressed anytime soon.

Nothing beats proximity to CBD

I acknowledge that some people enjoy living in the country or regional towns – the city is not for everyone. However, for the majority, the amenities, educational options and employment opportunities (amongst a lot of other things) that capital cities provide are a massive draw card.

That said, transportation is a growing problem. One of our team members took an hour to get into work last week and she lives 11kms away from the CBD! Our public transport systems are a joke. Our roads are getting busier. This means the closer to the CBD you are, the more transport options you have, and this alleviates some of these headaches.

The strong projected population growth will only exacerbate these transport/traffic woes.

Living within 15kms from the CBD is advantageous today. And it will be substantially more advantageous in 10 to 20 years!

Supply/demand imbalance likely to get worse over the next few decades

The chart below is courtesy of Pete Wargent (check out his excellent blog here). It charts the growth in Melbourne’s population versus the number of new houses being built. The gap between the red and blue lines is potentially a housing supply shortage.

Of course, there doesn’t need to be a separate house for each person i.e. multiple people (i.e. families) will occupy one house, but the trend demonstrates that market is moving towards a supply shortage. (Pete has charted NSW too – here).

projected population growth

Melbourne’s population is forecast to reach 5 million by 2021 (currently 4.44 million) and 8 million by 2050. High-rise approvals have fallen by almost half – which means a lot fewer apartments are in the pipeline.

Again, the high population growth together will fall in housing supply means we will probably have a house supply deficit. If you overlay that with the fact that inner-ring, blue-chip suburbs will continue to be very desirable (and even more desirable as traffic congestion worsens), a positive investment opportunity becomes more obvious. I believe that at some point in the future, properties in these blue-chip suburbs will become unattainable for people – except perhaps for the very wealthy.

Play the long game

The long-term indicators for investment-grade, inner-city properties are very strong in my opinion. Due to Australia’s geographical and density challenges, inner-city property will always benefit from excessive demand. Australia’s high projected population growth will only exacerbate this imbalance of supply and demand. And supply and demand imbalances inevitably lead to price growth in the long run.

In summary, there are two points I would like to reiterate:

  1. Australia’s unique situation means that its property markets are very different to other countries. There are huge demand pressures on our capital cities. This uniqueness creates investment opportunities; and
  2. I can’t predict what property will do in the short term, but the longer-term indicators certainly suggest that Australia property will continue its long-term growth trajectory. Investors that take a long-term view, are likely to be well rewarded for their patience.

The property market is showing green shoots. Whilst it is too early to call it a recovery, it possibly indicates that the market has bottomed out. If this is correct, now could be a perfect time to invest (if its suitable for you to do so).