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Understanding Property Cycles and Structural Change [Part 1 of 2]

Property cycles in Australia have been the key determinant of profitable property development.  Property cycles in Australia are an outcome of the small size of the Australian economy.  This means that Australia responds to global forces such as oil shocks or economic booms, rather than generating growth internally.  Interest rates are the primary federal government stabilisation response mechanism, and are of critical importance for residential (and other) construction.  Interest rate adjustments are critical in terms of impacting on economic and employment multipliers, and also in terms of creating value in residential mortgages which underpin the Australian banking system.  In short, Australia will continue to experience property cycles because interest rates will continue to move up and down to stabilise the Australian economy.  The practice of buying early in property cycles and selling before the ’peak’ has historically been a key value driver for the property sector.

Property cycles will be supplemented by major structural change (economic and social).  This means that betting on timing is only one way to secure relatively high returns.  Understanding new geographies and new property products (e.g. new retirement living products will provide lower risks and potentially improve returns.)               

Understanding Property Cycles

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Understanding Major Structural Economic Change

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Understanding Property Markets

The first step in moving beyond focusing primarily on planning to maximise profit is to understand key future drivers of change.  This takes property and planning professionals beyond traditional analysis based on simple trend demographics and population growth.  This traditional analysis drove predictable growth in dwelling numbers, and retail, commercial and industrial floor space, occurring in relatively predictable locations over the past 30 years.  The structural analysis is focused on sectoral growth and change, wealth creation, labour mobility, investment return, productivity and participation. Structural change is driving far more complex and less predictable growth and change.Ageing, globalisation and exports supported by ICT will shape the next two major Australian property cycles, which are likely to emerge between 2015 and 2030.  Unlike the suburbanisation ‘long wave’ (1950–2000) which had previously driven property development and planning, from 2015 the AIGE era will not rely solely on fringe urban expansion as a primary growth driver[1].  This means that both the private and the public sector, as well as the emerging not-for-profit sector, will need to change strategic directions to either profit from or plan for growth and structural change.  As the dynamics change between the key sectors, many new development and funding opportunities will emerge.

Part A of this book begins with a subject which at first glance may seem a little off topic.  However, health and ageing are likely to jointly generate the biggest short-term predictable impacts on the Australian property market in the future, for two reasons.  First, real government expenditure on health and ageing will double in the next 40 years while all other expenditure remains relatively stable; this will result in new hospitals, care facilities and a major new healthcare sector.  Second, health is the fastest and largest employment growth sector, and is far more significant than the resources sector.  The biggest impacts are not being seen in the traditional retirement village sector (yet), because over 90% of potential retirees are not yet relocating to retirement villages.  Employment participation has doubled (and will continue to increase) for the 65+ age group.  This phenomenon has probably pushed the aged care crisis and restructure of the sector out 5–10 years, but demographic inevitability will begin to dramatically reshape the sector by 2017.

The private and not-for-profit sectors are searching for new business models for aged accommodation and care.  For example, the Deferred Management Fee (DMF) retirement village tenancy option puts a cap on demand for village residency.  Further, as the federal government switches from funding residential care beds (nursing homes) to in-home care packages, the entire structure and geography of the aged care sector will evolve.  These changes were only initiated in 2012/13, and the impacts will emerge in 2014/15.

ICT is changing economic and spatial relationships in overt and covert ways. Overtly, the internet, smartphones and social networking are changing the hardware and software of daily life.  Covertly, data access and innovation potential are changing business structures and the barriers between work and play.  The future ‘contractor’ base will magnify the opportunity and role of microbusinesses and SMEs[2].  This means that in a physical sense, new opportunities to aggregate, collaborate and integrate will be required to maximise the overall opportunity, such as business clusters in low-cost locations, increasing ease of inter-business communication and network building, amongst other things.

Existing industry sectors will continue to grow, but more importantly new businesses not yet contemplated will emerge.  For example, the number of total staff of Google (founded in 1998), Twitter (2006) and Facebook (2004) is currently over 50,000.


[1] Australia’s key AREITs including Westfield (by far the largest), Stockland, Lend Lease (Delfin) and Australand have all relied on fringe expansion as a major source of profit, as have state governments (e.g. ACT, WA, VIC, NSW) and the major house builders (e.g. Jennings, Henley, Clarendon (Australand) and ABN (Alcock Brown-Neaves) Group).

[2] Small to Medium Enterprises

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Over the next few months, Brian Haratsis will share excerpts from his book, Beyond the Fringe on the MacroPlan website.  If you have any questions regarding the excerpts or you would like to order a copy of the book, please contact Dorothy Patrick, Executive Assistant to the Chairman on 03 9600 0500 or via email patrick@macroplan.com.au

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About the author:

Brian HaratsisBrian Haratsis
Executive Chairman
E: haratsis@macroplan.com.au
P: 03 9600 0500
Brian Haratsis is MacroPlan’s Founder and Executive Chairman. Brian is an economist and future strategist with over 30 years’ experience as an advisor to governments and major corporate clients throughout Australia.Brian commands an unparalleled, on-the-ground knowledge of residential markets across Australia, having worked extensively and regularly in all capital cities and key regional markets. 
About MacroPlan:
MacroPlan’s experienced and qualified economists align their understanding of macro-economic forces with micro-economic variables such as geographic and industrial characteristics, demographics, labour market shifts, resource demand and commercial realities.  Contact Brian Haratsis, Executive Chairman today to discuss your property research requirements.
ORDER YOUR COPY OF ‘BEYOND THE FRINGE’ HERE.
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