PROPERTY PRICES CAN DOUBLE IN THE NEXT 5 YEARS
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Transcript of: Property Prices Can Double In The Next 5 Years
Hey, guys! Will here.
Today I’m going to go into why I think house prices can double in the next 5 years. This may seem totally the opposite to how the market is feeling, but I’m partially doing this just to document and look back in 5 years’ time to see what actually happened.
It might seem extremely illogical given the current market sentiment, so I’m going to breakdown this theory into the main factors of why I think this can happen.
I’ve been thinking about house prices for a long time. Good times for the housing market generally mean good times for my business, so it makes sense for me to keep tabs on the housing market.
In 2020 something major happened that no one paid attention to which I’m going to attempt to explain.
Everyone had their eyes diverted to the pandemic and the world’s response to it.
In March 2020, Virgin Airlines were the first to put their hands up and say we’re in trouble and we only have a month’s worth of cash left. I’m not even sure if we had started lockdowns by then. My immediate thought was “how is a massive company operating only with so little cash?”
This case was not just an Australian thing. It was happening all around the western world. And the western world’s response was announcing huge stimulus packages.
All these places like US, Canada, all of Europe including the UK, New Zealand and Australia just created 20-30% of the money supply out of thin air.
At the end of the day all the “stimulus” spending greatly contributed to the recent price spike. This is a clip from last year which explains this concept. (Clip plays)
I really like that clip because it just shows the mechanical way that house prices will keep rising.
What I want to double back to is Virgin Airlines having no money because this to me was when everything changed.
I thought, “Hang on, if all these companies need government money to keep on operating because they are holding next to no cash, not even to get themselves through a bad few months, then this is not good”.
Then the stimulus came out. They use the word stimulus like it’s going to be used for projects that will grow the economy. What I found was that if you swap the word stimulus for welfare, it’s probably more apt. Let me explain it from a personal finance point of view.
If you have someone who is spending more than what they are earning and they’re in trouble, you wouldn’t give them a hand out and think they are just going to turn things around?
This is the game that’s being played right now.
Now stay with me here because this is where the property market gets the rocket fuel it needs to go off.
If companies are not operating well, eventually the “stimulus” money will stop flowing through the economy as we’re seeing now, then company earnings will eventually start decreasing.
If earnings decrease, then the value of those companies starts decreasing.
To put it another way the stock market crashes. On top of this, companies start cutting jobs in order to survive through an oncoming recession – we are already seeing this in America right now.
This is when the politicians start doing something because companies start cutting jobs and if there’s a sure way to get voted out, that’s by managing sky rocketing unemployment.
The question here is how much more “stimulus” will the government create?
To be honest, it’s not simply going to double the money supply. If I took what I think is a conservative stab in the dark, I would say another 30% over the 5-year time frame.
That alone won’t get the housing market to double. Let’s take a look at some other contributing factors.
1. Housing shortage
Remember the oversupply we had in the apartment market about 5 years ago? You probably don’t, but trust me here.
That over supply ended with a saga we had over developers using poorly made imported building supplies, which made those buildings unsafe for people to live in. This led to a tightening of industry standards which in turn led to less buildings getting built.
Actually the approvals for dwellings excluding houses have been in a decreasing trend since 2016.
Now we are seeing articles telling us we are on the cusp of an apartment market shortage.
On top of this we have not just sky scraper developers like Grollo which have gone bankrupt, we also have rumblings that the whole building industry is shaky.
Builders are finding it hard to manage the fluctuation in building supplies and the increasing cost of labour.
So both the increasing costs to build and the shortage of supply of housing are going to contribute to this next leg of the property bull market.
2. Increasing population
To add to the housing shortage is the increasing population growth.
One little hack our governments have used in the past to show us how well our economy is performing is too constantly immigrate skilled workers.
Let me explain, if we assume that everything is constant apart from immigration which was a 2% population growth, you would expect our GDP which is the total of what we all spend as a nation, to rise by 2%.
Basically what I’m saying is that immigration has helped hide the under performance of our economy therefor you can bet your bottom dollar that immigration will be back to at least pre-pandemic levels. If you believe that then you also must believe that it will create further demand on the property market in the coming years.
We know the immigration tap is going to be turned back soon, with estimates we are going to have over 200,000 new Australians from immigration every year. All of these people need housing which there is already a shortage of.
3. Government grants
Government grants & schemes are accelerating as house prices continue increasing.
House prices go up; the Government comes to the rescue with more schemes and money.
It’s a self-fulfilling prophecy.
Labor just got voted in to government with a promise to make a scheme available to first home buyers where they co-buy the property with the home buyer and take up to a 40% share in the purchase of that property.
The thing is, governments realise that if the property market fails it’s going to show how bad things actually are, so pretend and extend is the rule here.
And they’ve been extending first home buyer grants since 2000 when little Johnny Howard first introduced the First Home Owner Grant.
People don’t get what a big deal this is for property prices because they don’t get leverage. An extra $10,000 grant money doesn’t seem like a lot but with $10,000 you can potentially borrow an extra $100,000 against it.
Extending these grants and schemes is as close as what you can get to being guaranteed in these uncertain times.
4. Record Infrastructure Spending
Governments love keeping our unemployment rates down. One classic way of doing this is by infrastructure spending, and our state and federal governments have ramped up infrastructure spending like you wouldn’t believe.
At its core infrastructure allows for more production. More production for businesses means more profit, which means they can pay their skilled employees more, and when people get paid more they pay more for property.
This is why property costs more in cities. The better infrastructure attracts more businesses and that creates demand for skilled work.
That is how property goes up long term as a result of infrastructure creation. How it goes up short to mid-term is the construction of that infrastructure – that is the infrastructure spending. The construction of infrastructure always requires more jobs – that’s why governments are spending money in the first place.
I want to make a comment here – do you wonder why there is a job shortage right now? Partly, it’s because there are all these jobs that are reliant on government spending. This shortage of supply of jobs means that wages will get pushed up which we are long overdue for.
Rising wages will generally mean people can pay more for housing. This can be avoided by governments by rising interest rates accordingly which means despite higher incomes, people cannot borrow more.
Unfortunately, this is a key to the problems in our economy. One of the major factors as to why people spend money is the wealth effect. Spending is very important to the government because that makes our GDP go up and that is a major KPI for performance.
This ensures rising interest rates won’t be a problem for long. Let me spell it out – rising interest rates means lower house prices, which means people fell less wealthy then spend less.
Lower spending means lower GDP. Two quarters of lower GDP means we are back in recession town.
In my opinion rates will eventually have to come back down which means people are going to be able to borrow more. This added demand into the property market means it can add fuel for the next housing boom.
What do I think?
I think we can see 50-100% gains over the next 5 years once we get through this hard period that’s about hit.
A common theme which I haven’t mentioned is that we are going into a stage of monetary expansion, said in another way – we have to inflate the debt away.
People all around the world are waking up to this and are starting to buy things which will hold value over time. There are many different assets you can buy to achieve this but here in Australia, we only think one asset exists.
It’s ultimately going to drive this market to unthinkable highs.
Is this a good thing? No, it’s going to create more problems than what we have now. But I think it has a good chance of happening anyway.
I’d like to ask you now, what you think about this video? I know this is going to cause some triggers but if you have opinions that don’t match with mine, I’d love it if you could leave a comment and elaborate.
Also please like and subscribe – catch you next time!
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