Baby boomers prop up residential property

Australia’s residential property boom will grind to a halt under the weight of rising interest rates, however baby boomers will ensure investors still make money out of direct property investment. Rod Cornish reports.

Australia’s residential property boom will grind to a halt under the weight of rising interest rates, however baby boomers will ensure investors still make money out of direct property investment. Rod Cornish reports.

Investors in the housing markets in Sydney and Melbourne could have hardly made a wrong move over the past four years. Prices increased across the board, by almost 50 per cent in Sydney and by an impressive 70 per cent in Melbourne, as investors and owner-occupiers competed for stock.

But pent-up demand has now largely been met. Rising interest rates and the release of new supply will soften both markets from the second half of the year. We predict at least one more rise in official rates and are forecasting variable mortgage rates to peak at eight per cent mid-2001. The interest rate rise is likely to trigger a market downturn which will noticeably slow investment activity.

However, there are still niche opportunities in some residential markets, notably in those markets that appeal to our ageing baby boomers.

Lifestyle locations

Boomers, Generation Next and Generation X are demanding ‘lifestyle housing’ featuring individual design located close to cafes, restaurants and cinemas.

Lifestyle locations will also offer investment and development opportunities over the next few years due to increasing wealth and rapidly changing work patterns.

Demand for second homes will surge as growing numbers of ageing boomers purchase two residences: a low maintenance home in the city and a beach house or country property. Lifestyle locations with potential for growth include:

? Parts of the south and central coasts within two hours of Sydney

? Hunter Valley (NSW)

? Mornington Peninsula (Victoria)

? Gold and Sunshine Coasts

Why are ageing boomers going to be so important to the property market and the Australian economy over the next decade?

The answer lies in pure maths.

Consider this. The first of the boomers - people born between 1946 and 1964 - are now 54 years of age and by the end of the decade, nearly all will be within the 50-65 year age group.

This age group is forecast to grow at more than three times the average rate of population growth in the first half of the decade and at two-and-a-half times the average rate going further out to the end of the decade. That is massive growth.

To capture this growth, the housing industry needs to seek out the answers to some critical questions.

Will the housing choices of the ageing boomers be the same as those of their parents?

Will they remain in the same family home until illness or lack of mobility forces them to move to a nursing home, or will there be a major shift in their housing preferences toward low-maintenance, medium-density housing that provides security and lifestyle choice?

The latter trend is already apparent in select locations - but this is only the beginning.

We believe that an increasing number of home owners in the 50-65 year age group will sell their large family homes ten years earlier than their parents and relocate to new, well-designed smaller homes.

It needs to be emphasised that we are not talking about retirement villages, where the average age is 75, although this market will also offer investment opportunities.

Our view is that most boomers will not completely retire as they enter the 50-65 year age group. After all, boomers grew up believing they would never age. If they fully retired, spending all of their time at the tennis or golf club, wouldn’t this mean they had grown old?

And, remember, too, boomers virtually invented conspicuous middle-class consumption. To maintain their lifestyle, a high proportion of boomers in this age group will need to keep working, at least part time.

Nevertheless, we expect more people to change their lifestyles and working patterns.

Considering the advances in technology, ageing boomers, particularly those in knowledge based industries, are likely to spend more time working away from the office. An increasing number will also work only three or four days a week.

Some will spend more time at home. Others with the financial capacity will spend some of their working week and leisure time at their second home in a lifestyle location.

To our knowledge, there is no completed research, either in Australia or overseas, about future housing preferences of the ageing boomers, but we are prepared to make an educated guess.

Some of the trends we expect to emerge as increasing numbers of home owners in the 50-65 year age bracket move to new, well-designed low maintenance homes, include:

? Investment value will continue to be a significant factor - the boomer generation places a high value on housing as an investment and as a mark of success.

? Many will want enough cash left over from the sale of their family home for other uses such as an investment portfolio, a deposit on a second home or an overseas holiday. In terms of pricing, this new housing will need to be cheaper than, or at least on a par with, the average price of established homes in the same location.

? As more time than ever before will be spent at home, there will be a stronger emphasis placed on housing design and quality.

? A focus on low maintenance and ‘lock-up and leave’ security, as increasing numbers of boomers purchase second homes and take more holidays.

Design requirements are likely to include:

? a media room/study, or at least a defined area in large master bedroom, with fast cabling for internet access and cable television to enable work to be done from home;

? a guest area positioned away from the main bedroom for visiting children or grandchildren;

? a large lock-up garage - at least 1½ car spaces - for hobbies and recreation.

At present, the only housing projects providing some of these features are the new upper-priced developments of high density apartments in city fringe areas. Here the problem is pricing.

These apartments will be the answer for some wealthy boomers, and certainly the locations of the developments are suitable, being close to facilities, transport and entertainment. But for an overall solution, the housing will need to be cheaper than the average price of established detached dwellings in surrounding suburbs.

A side-effect of these changing demographic trends, will be reduced growth in demand for traditional housing, especially in outer ring suburbs. In fact, demographic trends work against today’s outer suburbs, many of which were created at a time of strong growth in the child-rearing age groups. This drove the shift to the suburbs, not only because of the space available but also because of the quality of schooling.

But now that boomers’ children are entering adulthood and many Generation Xers are putting off families to concentrate on careers, demand for housing in the outer suburbs is likely to taper off.

There are numerous other issues, but for the first round of investors who get the formula right, there will be substantial gains to be made.

Forecast percentage annual growth by age group Australia

Source: Australian Bureau of Statistics

Rod Cornish is head of Macquarie Property Research