Why it could be time to prepare for the next property boom

Right now, the baby boomer effect is likely to push up property prices, keeping the market buoyant. Baby boomers - 76 million of them were born around the world between 1946 and 1964 in the population boom after World War II - are commonly regarded as the wealthiest group with the most disposable income.

Many Australian boomers own family homes and have spent years investing, be it in property, shares or government bonds.

Despite this long-term theme of baby boomer homeownership, most real estate commentary is focused on millennials getting into the market and government incentives to help increase ownership.

But with the ageing of the baby boomer generation leading to the sale of many large family homes, we will start to see an increase in house and unit prices across Australia,  especially for villa-style, smaller dwellings. This will encourage more investment in the market from both domestic and international investors, which will chew up the supply.

Baby boomers are back in the property market for two main reasons: 
1. Investment yields. Falling interest rates are a big problem. Self-funded retirees have generally preferred term deposits and shares for their income. However, low rates over a long period of time are forcing many to buy investment properties instead.
2. Home retirement. The federal government is promoting home care, although the system has its share of problems, such as long waiting lists. Due to a shortage of adequate retirement and nursing home facilities, more boomers might retire in their existing properties with government support, limiting the housing supply.

These influences will place upward pressure on house prices over the next 10 to 15 years.

Cash is no longer king

Self-managed super funds poured $39 billion into real estate in the year ending June 30, 2020 - a rise of around 7.5% compared with the previous corresponding period. SMSF assets held in Australian shares fell by 12% over the same period.

Investment consultant Kel Dickins, 66, says he's been in the property game since he was 15 years old. The baby boomers he speaks to come from two divergent schools of thought. "The first doesn't believe that property prices will stay as high as they are, and the others don't know but know they can't afford to be out of property," he says.

He sees a lot of emotion among those who chose not to buy, as prices increase and interest rates stay low. There is a lot of marital tension and some questioning of the decisions that have been taken.

"I'm seeing it all over. There's a lot of unsettled baby boomers who can't believe the prices have kept going. But as the Reserve Bank says, interest rates are going to stay low for longer, perhaps until 2024."

He says some of the boomers he sees intended to downsize and sold their property so they could boost their super or move out of the city.

"They might have found Noosa is not for them and then moved back and now can't afford property and are renting," he says. "I'm now seeing 70-year-olds who are renting and have gone back to work."

Those who chose to invest have seen commercial properties that they bought, even if they don't have tenants, rise in value, he says.

"They don't care [if the property is untenanted]. They see it as a secure asset that will go up in value and be a store of wealth even if it's not giving an income - like gold. A lot of investors are happy to stay in property and are not ruling out buying more right now."

Dickins says he is currently advising a 68-year-old client in South Australia's Barossa Valley. The client is looking to put his properties to work to get a better income stream. "He's looking at rationalising his portfolio and seeing what he can do with it. He sees property as a store of wealth."

There's also anecdotal evidence of more mature-aged investors buying residential real estate in Sydney and Melbourne as they move cash out of their term deposits, now lucky to be yielding anything above 0.5%.

Houses versus units

Covid-19 has virtually stopped the influx of students and permanent overseas migrants in our two biggest cities, Sydney and Melbourne, bringing income risk for apartments, as rents have fallen in these markets.

There have also been signs of people leaving apartments and opting to live in houses, which are more user-friendly for working from home or periods of lockdown or quarantine.

While houses have remained solid performers, there is some price risk due to the premium currently being factored in. The fact that houses have risen in value more than apartments also brings risks. On the other hand, because apartments have seen less of a price rise, it is more likely they will benefit from future growth.

According to SQM Research, the Sydney residential vacancy rate in May 2020 was sitting at 4%. This has since improved to the current level of 3.2%; however, it is still poor compared with the 1.7% in May 2017.

Either way, self-funded retirees will be looking to alternative income sources, without getting into investments they see as too risky, such as cryptocurrency, a millennial favourite.

Although the Reserve Bank has said it expects to leave interest rates at record lows for at least a few more years, returns on investments have been declining for more than a decade now and many retirees are losing patience.

Baby boomers see residential investment as an illiquid investment, yet stable and secure enough with a superior yield to cash and none of the volatility of shares.

With the federal government slowly reducing stimulus programs and mortgage holidays being phased out over the next three to six months, there's every chance the RBA will be as good as its word. Its goal is to get the economy moving and, by its own admission, it is prepared to do whatever it takes.

But what does this mean for property investors, in particular baby boomers?

Where to look

Simon Pressley, the managing director of Propertyology, an analyst and buying agency, predicted correctly during the 2020 lockdowns there would be a property boom, not a downturn.

He says baby boomers have always represented a big part of the investment market, although for the past two years investment has been at record lows.

"But since about November last year there has been an increase. It is still down, but we expect it to accelerate strongly," he says.

The biggest segment of the market remains owner-occupiers who are upgrading as they build equity in their properties while interest rates are low.

The large price falls that were predicted as a result of the pandemic have simply not eventuated. In fact, Westpac Economics has suggested that all the capital cities will see growth of around 15% in 2022-23.

Brisbane and Perth are expected to lead the way with 20% and 18% gains - good news for baby boomers looking to sell in these areas.

While property investors might not see much more in terms of savings on their mortgages, it's clear that this is not only helping prices hold strong but more than likely will be a key ingredient for growth in 2021 and beyond.

Baby boomers will find themselves up against first homebuyers who are keen to take advantage of the lower rates. Typically, first homebuyers are seeking house-and-land packages in new suburbs while baby boomers often opt for older, more established properties in affluent areas. Commercial property is also a low-risk investment for hungry baby boomer investors.

Where scarcity could emerge

The trend of more boomers staying at home, with government-assisted care, could mean fewer properties coming onto the market and less demand for aged care facilities. Government support could also see new investment opportunities emerge, with entrepreneurs looking to repurpose properties to suit home care.

There's an opportunity for savvy investors to alter large family homes by splitting them so that more than one retired couple can live there or by creating a separate wing to accommodate other family members.

There are also opportunities in smaller types of accommodation, such as townhouses and villas, which in future years are likely to appeal to ageing downsizers.

Investors should seek to make these user-friendly for the elderly by removing awkward levels and installing fixtures such as rails and ramps for a comfortable transition into elderly living.

The bottom line is that demand for these types of property can be expected to grow.

Stay on top of change

Keeping up to date with government policy on such issues as migration and coronavirus developments, as well as evolving work patterns and societal changes, is vital to successful property investment.

One of the greatest risks to values over the next few years is falling rents due to lower migration. This is already factored into apartment prices, which trail house prices. However, as borders re-open and migrants return, apartments and houses are set to benefit from the low rates, a stronger economy, limited new supply and a flood of both new and older buyers, each interested in their own wealth strategies.

The way older Australians manage their assets and use their home will change in the future, shifting fundamentals behind housing demand and supply. In the medium term, the fundamentals for metro housing remain solid.

The gap between apartments and houses has recently widened due to lower rental demand for the former. But as borders open and demand strengthens, apartments will once again become more attractive.

COVID-19 has taught Australians that the once aspirational sea change or tree change is more attainable than they thought. They're choosing to live closer to the beach and the bush, which is dragging them out of their small inner-city units or homes into larger properties. This trend has resulted in rents for bigger, freestanding houses rising sharply in many areas across the country.

Prepare for the next boom

Regulators will be cautious throughout this cycle and we could see the return of lending restrictions.

This would limit house price growth and eventually encourage investors to consider apartments for value reasons. Apartments in Melbourne and Sydney priced at under $800,000, with yields of 4% or more, are the most attractive over the next two to three years.

Eventually, the economy will come back - no one knows when, but it will be back. When that happens, prices may start rising.

As younger investors put their money in riskier assets like cryptocurrencies, baby boomers as a whole will remain cautious. Cash remains the biggest loser for investing in 2021 as baby boomers recognise the benefits of investing outside traditional safe assets like term deposits.

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