Australia HCDROPS
HCG DROPS

HCG DROPS

Whether Australia will continue to increase immigration or reduce its current level of immigration can have a significant impact on your property investment strategies. So today I’d like to talk about how to go with the trend rather than against the pattern when putting your investment strategies together.

The current debate

Over the past few years, there has been an ongoing debate between whether we should have a “Small Australia” or a “Big Australia”. The supporters of a Big Australia would like to see our population increased to 36 million by 2050. This means roughly 400,000 new migrants on average coming to Australia each year. While the Small Australia camp wish to see our populace kept to a lot less than that.

There are a lot of pros and cons being thrown around by both sides of the debate: from what degree of growth is sustainable to whether we’d be paying higher taxes, and even more extreme scenarios such as cultural shift and racial domination. I’m not going to bore you with any of these, you can Google them for yourself, and take whichever side you like, or simply pay no attention to any of them.

The problem with such a debate is that people sometimes think that if one side presents a more logical and better rationale, then that side should win the argument. But in reality, our society’s progress is not usually a contest of logic or good reasoning. You can sit in a classroom and win a debate 10 times over, but outside the classroom, it is factors such as “Influence” and “Emotion” which rule.

If you want a simple demonstration of this, just ask 10 of your friends, who are still in a marriage today, how many of them examined the pros and cons and worked out the probability of the survival of the marriage, before they got into it. If most people can’t even apply reasoning and good reasoning to one of the most important decisions in their lives that they can control, how do you expect them to apply logic and good reasoning to an issue that they have little control over – such as whether we ought to become a Big Australia or a Small Australia?

This is one of the reasons why I have learnt over the years to give more importance to facts, and pay less focus on logic and good reasoning. You will benefit more in life by placing your attention on what has actually happened (i.e. the facts) rather than what should have happened.

The facts

Over the last few years, our immigration numbers have been hovering around the 400,000 every year. Some years have been slightly higher and other years somewhat lower. 40 years ago our population was 12.6 million people. Today it is over 22.7 million. If we continue steadily to grow at the same rate, we will reach 40.6 million in 2050, which is bigger than the 36 million big Australia projection. So it looks like, whether people like it or not, Australia is on track to become a “Big Australia” anyway.

Currently baby-boomers are beginning a “mass retirement” starting from 2012. Those who retire before 2020 are more likely to rely on the government pension system as they won’t have enough compulsory superannuation. All these retirees will mean that we will need more workers to pay enough taxes to support the federal government pension system. So I see it as almost a necessity for the government to keep immigration at the current level, or even higher at least till 2020.

Australia has locked in over $830* Billion worth of investment for the years to come. We need to deliver the goods according to those contracts, but we don’t seem to have sufficient people to produce them all. Recently the heads of many major mining companies have been fiercely critical of the government’s red tape that restricts them from bringing employees into Australia to work. Some are suggesting we solve this problem by allowing large numbers of temporary guest workers to come into Australia to work. (Most property investors can understand the anxiety of the mining companies. It’s similar to when a property developer has pre-sold a 100 unit development to buyers, and now realises that there are not enough workers available to build them!)

*June 2011 issue Deloitte Access Economics Investment Monitor

The real contest

What may determine the outcome of Australia’s human population? In my opinion two main factors: influence and emotion. Let’s go through them one at a time.

Influence

We all know that it is the federal government who decides whether we will increase or decrease immigration on an annual basis. But what influences the government’s decisions?

There are two types of governments in our world: autocratic or democratic.

In an autocratic society, political influence dominates economic decisions. i.e. the politicians (such as a dictator) will dominate business decisions.
In a democratic society, financial influence dominates political decisions. i.e. the business community (such as all the lobby groups) are more likely to dominate political decisions.
Australia is a democratic society. Here, after winning the office, politicians tend to be spokesmen for their political campaign masters (i.e. donors) or lobbying organizations such as businesses, especially the largest businesses. Hence you have a tendency to see governments in a democratic culture bailing out the “too big to fail” businesses (such as what occurred in the US and Europe), and not necessarily acting for the little people who have less direct impact.

This is not a statement by the way of what is good or bad, it is just the reality of the way different systems work for different people.

So here is the key question: do you think the biggest businesses in Australia want more migrants or fewer migrants?

Let’s look at the needs of the largest businesses and organisations in Australia:

Do you think the mining companies want more employees to deliver their contracts?
Do you consider the biggest airlines want more passengers?
Do you think the largest retailers and shopping centre owners want to have more people shopping?
Do you consider the largest property developers and builders want more folks buying their properties?
Do you think the largest banks want to have more people paying interest?
Do you consider the largest universities want more students?
Do you think the biggest pharmaceutical companies want to have more people to buy their drugs?
Do you consider the largest religions want more followers?
As you can clearly see, politicians will be constantly under the influence of these powerful self-interest groupings to continue increasing the population. Now what do you consider of the chance of Australia not having more migrants?

Before coming to Australia, I used to live in a country where politicians often dictated to businesses what to do. After living in Australia for 23 years, I am fascinated to watch just how many of the politics outcomes are determined by bargaining between politicians and self-interest groups, and how much economic influence calls the shots in most of the government decisions. These powerful self-interest organizations try either influencing politicians directly or via the media indirectly.

You may ask how all this affects the average person who worries about losing their job to migrants or about our environment becoming unsustainable? From my observation, the average person’s influence is limited unless it’s coordinated via larger groups, so even when their opinions are quite logical and justified they unfortunately simply don’t have the economic impact to lobby the federal government or have the financial resources to put their own politicians in place.

I know this may sound disappointing for those who believe in a little Australia, but regrettably this is merely how democratic societies work. If I go back further in time, just within Australia, I am sure that if you had asked the Aboriginal people a couple of hundred years ago whether they would have liked to have 22 million people coming into their country, their answer would probably have been a resounding NO!, But they simply did not have enough influence to stop them.

Obviously I am not discussing the morals and ethics of these situations here. As I said earlier, I am just discussing the facts of what has happened. I believe everyone is entitled to what they believe in, and there are always two sides of the same coin on any issue we like or dislike any way. All I’m trying to do is show you what the trend is so that you can invest your money wisely.

It is important to remember that we don’t have to like everything that is happening out there as an investor, but we can benefit from the tendency even if we don’t like what is going on. That is similar to the situation that you may not like gravity when you want to fly, but working against it is not smart.

Emotion

Another major factor that influences governments and politicians is public sentiment, i.e. human feelings. Politics today is a popularity contest. If you observe politics over the last 50 years in any industrial nation, the good old days of politicians who stood a chance of winning by holding true to their values and beliefs appear to have long gone. The best ideals to hold onto to earn office these days seem to be more and more about “whatever the public wants to hear”.

So it is important to find out whether the majority of the Australians are anti-immigration or pro-immigration and exactly how this sentiment may develop over the next few decades.

There are very a few countries in the world where the most their population is opposed to immigration, and they make it clear in their legislations. In other words, those countries have a very exclusive attitude towards other races. Australia does not have such a set of legislations.

A few other interesting facts are:

Apart from the original inhabitants of the country, all of us are migrants from one generation or another;
Today, half our inhabitants still speak another language than English at home;
Most Australians have blood lines they can trace from many different races and cultures;
I am a first era migrant myself. During the past 23 years I have lived in Australia, I can honestly say that I’ve never felt discriminated against. So overall Australia is quite an open, accommodating and multicultural country, and it is generally not fashionable to be racist here.

If you are not a first generation migrant yourself, you might not be aware of how much all first era migrants want to help their friends and family to migrate to the same country they are now in. They do this, because the migrants miss their family and friends but also because they want to help them to get a better life.

Think about how exactly this applies to the common 400,000 migrants getting into the country each year. This migration flow started 5 years back. Give it another 5 years, and a whopping 4 million new migrants (a figure equal to the entire people of Melbourne), will have been added to the pro-immigration sentiment. These 4 million potential new voters will put a lot of pressure on any political parties who want to stop their relatives and buddies from arriving here.

Hence I could see the craze of public sentiment being on the side of the “Big Australia”, and you know how politics will play out according to that development.

Big Australia vs Huge Australia

Recently I have been doing some numbers myself and I can sense a new debate coming soon – one called “Big Australia vs Huge Australia”. (I hope I am not the first one to come up with this name, as I really don’t want to be known as the guy who started the Big Australia vs Huge Australian argument in Australia.)

Let’s define what I mean by a “Huge Australia” first. If a “Big Australia” means adding 14 million visitors to the current population to take it to 36 million, then maybe a “Huge Australia” should double that increase to add 28 million people to take the populace to 50 million people!

If that figure shocks you, let me give you a different perspective from outside of Australia. If I were to explain to a Chinese friend of mine residing in China about the idea of a “Huge Australia”, I’m certain he would think that I have been living in Australia for far too long. He would guarantee me that at least one billion Chinese wouldn’t be able to understand why I would call 50 million people HUGE on a piece of land the size of Australia, which is similar to China and US. He’d probably still call us a “Small Australia” even if we reached a population of 50 million people, because he’d imagine the 22 million people we have today must be scattered all over the place to occupy such a very large but mostly unused island.

I think there is some merit to this view, don’t you? Imagine if the US had only 22 million people residing in it today (i.e. not much more than the population of Greater Los Angeles Area)? It would feel like a pretty empty island yet Australia is even bigger than the united states in land size!

Now why do I see the idea of a “Huge Australia” as not entirely crazy? Although currently I haven’t seen anyone proposing such a projection from the government or business community, here are a few key reasons why I think it is possible:

1) Australia has the means to become Huge.

Currently we are accepting 400,000 migrants normally every year. This converts to 1.8{8c6f3a7d6ed1076b5c9e09c9834ae2bbe88750a844b76ee68813e6cbd387c76d} increase of the existing population. All you have to do is to include another 0.2{8c6f3a7d6ed1076b5c9e09c9834ae2bbe88750a844b76ee68813e6cbd387c76d} to consider it to 2{8c6f3a7d6ed1076b5c9e09c9834ae2bbe88750a844b76ee68813e6cbd387c76d}, which is around an extra 50,000 people a year, be it guest workers or any other form of visas, it will take Australia to 50 million people by 2050.

A 2{8c6f3a7d6ed1076b5c9e09c9834ae2bbe88750a844b76ee68813e6cbd387c76d} increase per year in population is very little different to the 1.8{8c6f3a7d6ed1076b5c9e09c9834ae2bbe88750a844b76ee68813e6cbd387c76d} we are doing right now, which is still way below the threshold of noticeable difference. That is similar to our inflation figure. It is hard to notice price increases if they’re less than 3{8c6f3a7d6ed1076b5c9e09c9834ae2bbe88750a844b76ee68813e6cbd387c76d}. And at that rate they are highly unlikely to cause any financial chaos.

So if Australia wants to become Huge (i.e. have 50 million people by 2050), we’ve the methods to do it without the majority of the general public even noticing the difference.

The true question is not whether Australia wants to be Huge. For me, a more practical question probably should be whether Australia gets the choice NOT to become Huge!

2) Australia may be forced to become Huge.

None of us would question the arrival of the 4 seasons one after another, year after year. There is some kind of law behind this rotation which we can observe even if we can’t fully clarify it.

The changing of the seasons is similar to the way in which countries rise to become economic powers and then fall again. In the event that you look over the past 500 years, there have been 9 countries which rose to a level of power which enabled these to dominate the world economy in their own particular eras. They are Portugal, Spain, Holland, England, France, Germany, Japan, Russia and America. As the old saying goes, what goes up must come down. non-e of the countries escaped their decline and each gave way to another country to take on the role of leading the world.

We are actually well into the “Asian Century” as our Prime Minister has recently put it. I’d probably call it the “Australian Century”, as there has never been a time in history where Australia has been pushed to the centre of the world stage in terms of both financial and politics power.

Australia is uniquely positioned as a bridge between Asia and the rest of the world. It is the only country (apart from New Zealand) with a Western civilisation and lifestyle in the same time zone as Asia.

Today, the barrier of distance is being removed by technologies such as the Internet, video-conferencing, etc., only one hurdle to efficient communication still remains – the time-zone barrier!

You can communicate with most Asian countries during business hours by living in Australia. Alternatively you will need to work night shift or afternoon shift if you were based in European countries or America. This is one of the main explanations why so many multinationals strategically set up their Asian Pacific headquarters and design capacity in Australia.

Australia’s biggest problem for a long time has always been that it was considered “isolated” because of its distance from other continents. But now its location means it is perfectly positioned as the Western gateway to Asia. With the boom of Asia you can see why Australia has been getting such unprecedented attention lately. Have you noticed recently there is a fight for attention in Australia from the two largest economies in the world that represent the East and the West?

As “laid back” as the Australian culture has been in the past, I believe Australia will increasingly be required to take on some type of leadership role quickly, as the Western desperately needs to find growth opportunities from the East. At the same time the East desperately wants to improve their living standards, and Australia finds itself perfectly situated as the conduit for those two aims. Ultimately it means we have no alternative but to get bigger and wealthier.

After all, those 9 other countries, some noticeably smaller than Australia, all had their turn during the last 500 years. Using the decrease of America and Europe it has got to be someone else’s turn this time. If not Australia, can you pick another country in the Western world which is more flawlessly positioned and ready to prosper right now than us? I can’t.

3) It may be in Australia’s interest to be Huge.

Have you noticed that Australia has been busily shipping all the resources our 22 million people don’t currently need overseas? Quite simply, we are selling our most valuable resources to build up other countries rather than our own.

If you think this makes sense, put on the thinking hat as a property investor. Imagine you are a farmer sitting on a large piece of land. Which is smarter: just sell off your land now for today’s price or allow more folks to work for you on the land forever? That is one reason why you often see the majority of the larger land development projects being joint ventures between the farmer and the land programmer, so that the farmer gets a much better return on his land.

The Australian government is just like a farmer who happens to be sitting on a big parcel that has lots of potential. Why wouldn’t you allow more people to come and work on your land, instead of selling it off to overseas buyers just because you don’t have enough domestic demand?

This is one reason I think it is in Australia’s best interests to attract the finest talent from round the world to develop our more internationally competitive industries while we are available down our resources. Selling down our resources is only a temporary cash flow strategy; it isn’t a long-term survival investment strategy.

The Huge Opportunity for property investors

Simply put, there’s never been a much better time to be a property investor in this country. When you have potentially between 14 million and 28 million new migrants coming into Australia, you are talking about adding between 3-7 million more folks into a major city like Melbourne or Sydney over another 40 years, or between 100,000 to 200,000 per 12 months. You can start imaging how much wider and taller each of these cities will have to become.

The following are the key characteristics which underpin property investing trends for the future:

Most migrants are between your ages of 26 and 45. They tend to be in the age bracket where they have young kids, so a big percentage of new housing in Australia has to cater for these young families.
A large proportion of this generation of migrants come already skilled or qualified to earn a higher income than the average locals.
Most migrants will have to start out in Australia as tenants for the first couple of years as mortgage insurance companies simply won’t insure the banking institutions to lend money to someone who hasn’t yet established a reasonable work or credit history in Australia.
Most new migrants have a tendency to live around other past migrants from the same ethnic community for support.
Most migrants give high priority with their children’s education, as that is how they ended up qualifying to come to Australia, so good schools are very important to them.
First generation migrants are less concerned about the prestige of a suburb initially as they do not have the local knowledge of their local status. Convenience, access to inexpensive shopping and value for money are far more important than status for them for the first couple of years.
First generation migrants are usually good savers, and together with the good income they earn, you would expect the areas they choose to live will perform better than the average.
Summary

It really is my view that Australia is going into a golden era of prosperity. And home owners and property traders stand to advantage greatly from it.

As a general rule, you are less likely to lose in investing if you follow where in fact the banks put their money. For example, the banks followed the baby-boomers who were the biggest income generating group over the past 15 years. The suburbs they resided in did very well and some are even over-valued today.

Now with the baby-boomers retiring, the banking institutions have moved their focus to the next income producing group which are between the ages of 30-45. This group includes the massive number of migrants who will be generating good incomes over the next 15 years. If you buy in the areas where this group is likely to live, you stand to benefit more financially by going with this new trend.

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