When the next boom comes will you be a winner? Craig Turnbull

GUEST OBSERVER

You might be wondering why I am writing about the property boom, when the only one we really had over the last three years was in Sydney – and that’s done with now.

Even though the cycle has finished, its effects continue to linger and will do so, even after the next cycle begins.

Over the weekend I watched a show on Foxtel about the British property boom – particularly what had happened in London, with billions flowing in from overseas to buy up pretty much everything going in London. Some of the facts that came out of the show were disturbing, and have direct relevance here for our market.

The show said that the average first home buyer needed 22 years to save the 25,000 pound (~$50,000) deposit needed for the average priced property which was ~$400,000 across the country and ~$550,000 in London, for a first home/apartment. Other facts arising which were even more alarming:

1. 2.3 million first home buyers are relying on financial help from their family or parents to buy a home.

2. 3 million people aged 20-34 years live at home with their parents.

Prices have simply moved beyond their ability to buy and own a home. I am a firm believer that home ownership is the basis of wealth for most people, so what can they do when they cannot own a home?

Who wins, who loses in a property boom? On the face of it, it is a pretty easy question to answer.

In a property boom the winners are:

1. Property owners – especially those who sell their sites to developers, or people who own more than one property.

2. Developers – who build new homes at the start and mid-point of the boom.

3. Banks – who lend the money to fuel the boom.

4. Architects, builders, contractors, engineers, tradespeople, salespeople, suppliers, retailers – who all contribute to completing new homes, buildings and apartments.

In a property boom the losers are:

1. People who don’t own property – they can’t save enough to keep up with the rate of price increases. Home ownership becomes a dream.

2. Developers – especially those attracted by big returns and who come to the party late and may be left holding the bag when the market turns, as it always does.

3. Property owners – who sell and then can’t replace what they have sold, often being forced to move further out from where they want to be. It has simply become unaffordable to live in the big city and a regional location may be the only answer.

4. Banks - who loan too much to borrowers at low rates and then those borrowers struggle as interest rates rise, which often happens at the end of a boom.

A part of the show followed a young couple who were doing everything they could to buy a small flat on the outskirts of London. After months, they finally succeeded in securing something they could barely afford – but still had to press her mother for help. The mother agreed to sell her home so that she could gift the daughter some of the proceeds so that the daughter could buy the little flat. The mother would have to move out of London to the country to rebuy.

The relevance to the Australian market is striking, with the ratio of home prices to incomes becoming very uncomfortable and in many cases unaffordable. If you are a parent with aspiring children, you may need to be prepared to find a way to help, if you can, when they come asking in the future for a hand to buy a home.

Future increasing housing prices mean one or more of the following:

1. Lower rates of home ownership – generally speaking, the wealthier the economy, the higher the real estate prices and the lower the rate of home ownership. Future generations will have no choice but to rent. They will need to find other ways to build wealth.

2. Smaller homes – if developers, bankers and government can get their heads around this, it might be a temporary answer. Smaller area means lower price – but not necessarily good quality living. It might be a step on the property ladder?

3. Homes further away – generally the further from the CBD, the cheaper the land. This can only work if government can encourage more decentralization, flexible working hours, tele-commuting and extend transport lines – particularly rail - to cut down clogged freeways and travel times.

4. More people leaving the big cities – people who are priced out of Sydney & Melbourne may look to Hobart, Adelaide, perhaps even large regional cities like Wollongong, Newcastle, Geelong, Cairns or Townsville, all of which have populations over 100,000 – but much lower real estate prices.

5. More innovative ways to build cheaper homes will need to be developed. For example, modular, pre-cast, new types of building materials, even 3-D printing of homes.

Something has got to give.

The question is – what?

And lastly, when the next boom comes, as they always do – will you & yours be winners?

Craig Turnbull is an author, property developer and real estate investor. He can be contacted here.