Life and death issues the election campaign missed

06 September 2013

Two of the most important issues to have been given scant attention in the election campaign are ageing and property. Even less noticed is the inter-relationship between the two. The effect of ageing on property prices will be arguably the most important financial challenge facing Australian governments over the coming decades.

The ageing of a developed country's population is one of the biggest predictors of long term economic trends — especially house prices. In a number of developed economies, property prices peak when retirees started to outnumber those in the work force (called the dependency ratio). In countries such as the United States, Britain, Spain and Ireland, property prices started to turn down when the dependency ratio turned down. The effect was especially extreme in Japan. Property prices eventually halved, although this was also because of the country's extreme asset bubble.

Australia is now in that territory, and the fear is that Australian house prices will start to follow the same path. Since about 2000, baby boomers have heavily invested in property, borrowing aggressively to do so. Land values have fallen over the last two years, but they are still at about 250 per cent of GDP, up from about 170 per cent of GDP in 2000, and 80 per cent of GDP in 1980. Residential land values are about 200 per cent of GDP.

Australian property is thus worth more than twice Australia's stock market, and a sustained downturn in prices will mean a significant loss of financial wealth. The political challenge will be to manage the different generational impacts. Over the next two decades there will be a steadily growing number of baby boomers looking to sell property as they rationalise their assets in preparation for retirement. For younger people in the work force, the trend in terms of house price affordability is likely to improve.

For the older generations, the implications are less positive. Much of their property investment has been based on negative gearing, an investment strategy that needs house prices to rise to make any sense. If prices start falling, there may be a rush to offload even more properties.

The degree of economic impact will depend on speed: if prices fall fast, the banks will come under pressure. If they fall slowly, the transition will be less painful. But even a slow fall will mean a less wealthy older generation, which will mean a greater burden on the Federal

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ECONOMICS

Life and death issues the election campaign missed

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