Stumbled across this article on a New Zealand website. Interesting new angle on house price cycles (at least new to me) discussing a possible link to the baby boom. He calls it the "pig in the python" effect. Quite wordy but worth a read. It sounds very feasible. The article discusses New Zealand property but I guess the same phenomenon could apply in UK.
The House Price Crash of 2010
A thought-provoking article by Graeme Kennerley
A million dollar house sold for $450,000... sounds unbelievable? Then read on....
I want to put on public record the reasons why I predict that the upper part of the New Zealand residential property market will loose as much as 60% of its value starting around the year 2010.
It's all about demographics and, in particular, the generation of people known as the Baby Boomers. These are defined as the people born in the years following World War Two, (between the years 1946 and 1964). This generation was delivered at a birthrate four times higher than at any other time known in history.
Over one million babies were born at a rate of one hundred thousand per year, when New Zealand's population was just 2.5 million. This 'Pig In The Python' effect has moved through society and has had a very significant impact at every stage. Today the 'boomers generation makes up one quarter of New Zealand's population and the bulge has not leveled out despite natural population movement and a planned immigration policy over the last fifty years.
However, there is a second part of the “Pig In The Python" problem and that is the rapid drop off in birth rate that immediately followed the baby boomer generation. Once all the families that could have babies had completed their procreation, there was a large dip in the baby- making cycle that lasted another ten or so years. In other words, anyone that could have children all had them during the 1950's. What then followed was a 'vacuum' effect with very few babies being born over the next ten years. Contributing to this vacuum was the fact that very few children were born during the uncertainty of the preceding war period. These young people arrived at their reproductive age about 1960 and their low numbers further compounded the 'vacuum'.
This trailing dip in the graph, this ten year vacuum, this whiplash that followed the bulge has been the cause of as much readjustment in society as the rising wave that preceded it yet this effect has gone largely unnoticed. I call this the ‘Post Baby Boomer Vacuum Phenomena’. No other commentators have dwelt on this part of the effect but it is very significant.
Social chaos followed in the wake of the baby boomer generation as it moved through all its various stages. In the beginning maternity wards couldn't cope with the large numbers of babies being born but then went quiet from 1960 onwards. The same thing happened with Primary Schools bursting at the seams with huge rolls and teachers burdened with 40 kids per class. But then overflowing classrooms suddenly emptied and teachers were in oversupply as the wave moved on.
Organizations like Boy Scouts that up till then had flourished, faced difficulties recruiting numbers and became a shadow of their former self in the wake of much lower numbers.
During the 1980's I belonged to a young men's service club called Round Table New Zealand. Things went along well until the organization faced severe membership problems around 1990, the year that the average baby boomer turned 40 years old which was also the age at which all Round Tablers' faced mandatory retirement from the club. Young men were required to retire but no new members were taking their place. In a last ditch effort to keep the organization alive, the retirement age was increased to 45 years. But that only delayed the inevitable and exactly 5 years later the organization became extinct. Round Table New Zealand folded completely, a victim of the Post Baby Boomer Vacuum Phenomena as no new members could be found to sustain the club.
Now we arrive at the present time: Babyboomers have completed their own family cycle with the expensive years of bringing up children behind them and they are mostly at the peak of their earning years often with both partners still working. But unlike their own parents, this group has lashed out lavishly on personal consumption. Not for them the discipline of saving and going without as a run up to their own retirement. No sir, these people have done the exact opposite and have built huge new homes for themselves, have purchased other holiday property, lifestyle blocks or timeshare apartments and have filled their garages with all sorts of toys like 4x4 trucks, boats, Harley Davidsons and classic cars to name just a few.
Predictably, as the 'boomers built or bought their dream homes, these properties skyrocketed in value. With a million 'boomers all buying property at roughly the same time, it was no wonder that prices escalated.
My most recent property development in Christchurch was an 18 lot high quality, hillside sub-division pitched entirely at this market. With no schools nearby and a need to have two cars per household, in every case bar none these empty nesters built five bedroom, two and a half bathroom homes with treble garages. That means there are 90 bedrooms, 45 bathrooms and 54 garages for 18 couples. Think about that - there are 18 bedrooms occupied yet 90 bedrooms built!
And there are tens of thousands of this type of home now being built up and down the country. Real estate statistics now show that 2005 was the peak of the recent property price boom and that it has plateaued since. This is exactly in alignment with the last of the 'boomers buying into this phase of their housing needs. There is now a lull that will last until the first of these folk start to sell out and move into their next stage of life - downsizing, rationalizing, flushing out equity for their retirement and the like.
But the trouble is there are very few 'families' coming along behind them as this ten year gap in the population still exists. In fact the last three consensus figures show that only 18% of New Zealand's population now live in a 'nuclear family unit' with Mum & Dad and their children living under the same roof. Society has changed dramatically.
The next generation (Gen-X born 1964 - 1980, essentially the children of the baby Boomers) and their much smaller families are not only significantly smaller in number but they have a completely different criteria for their housing needs. This group is burdened with large student loans and a much later entry into their childrearing days, bought about by much longer training and qualifying periods before they are even able to enter the job market. They will also be looking for much more efficient cost/quality housing solutions close to schools, jobs and malls.
They have no use for an olive grove in Ohoka, a vineyard in Marlborough, a large home in Taupo or a home stay on the Coromandel. And as for the extensively refurbished family homes within the desirable high school zones that the 'boomers have been sitting on for years, chances are the Gen-X'ers don't need all those bedrooms and won't want to commit that much money to their housing anyway. In other words, the retiring Baby Boomers will become a victim of the Post Baby Boomer Vacuum Phenomena.
So I believe there is a crunch time coming and it's in the wake of the 'boomers moving on around year 2010 when the first wave will turn 65. As they find themselves alone without a spouse or incapacitated by a stroke or breast cancer or whatever, then the appeal of their mini-mansions overlooking the grape vines or in a leafy suburb will quickly fade. Once the architecturally-designed summer house in the Bay of Islands has not been used for a year or two; once they finally realize that their married daughter living in London or Sydney actually won't be moving back to the family home, then they will start to sell their assets.
As 100,000 'boomers every year for the next ten years reach this stage it will severely soften the market. A stable market requires a balance between prudent buyers and willing sellers. But the difference between over supply and under supply is not a thousand, not a hundred, or fifty, or twenty or even ten. The difference between over supply and under supply is one. Just one. Only one makes a difference.
This is where I differ from most other commentators who have failed to pick up on this critical point. Let me explain……..
If ten buyers are chasing ten properties in the market then a sense of balance persists and it comes down to a matter of choice between prudent buyer and willing seller.
If there are eleven people chasing ten properties then the feeling is one of under supply of property. This causes price escalation in the market. The first one to commit gets the house and this encourages other buyers to act quickly and not to barter too much - a condition that 'boomers have become used to all their lives
But when there are only nine people looking at ten properties, then there is a feeling of oversupply in the market and buyers will become very bargain conscious. They will start making low offers which at some point a motivated vendor will accept. This is the start of the fall in the market as one low sale in the street sets the new value for all the others.
And the same will happen in the Stock Market. Same principle; it only takes one more seller than there is a buyer to create a falling market. And 'boomers have experienced this situation before - remember the October 1987 share market crash when billions of dollars were written off the boards within days. This is why many 'boomers never returned to the stock market preferring instead to keep all their financial eggs in one real estate basket.
Of course in the beginning most 'boomers will hold off and not sell to bargain hunters. Some will even transfer their homes to their children via the very popular Family Trust arrangements at a very low attributed value. Neither of these situations is a true sale and they haven't got their cash out either.
Sooner or later someone will have to sell and this will be the crack in the dam, the thin edge of the wedge. More and more 'boomers will need to quit their properties as they need to substantially down size or move into retirement homes and there simply is not the volume in the market to buy these poorly located behemoths at the prices expected by the vendors.
This is when the million dollar homes will be worth little more than a modest home in an average city because that is the competition for the buyer's dollar.
Added to this, as the value drops, unfortunately the debt does not and, like a pyramid buried in the desert, as the winds of the market blow away the sands of equity, the rock solid pile of debt remains exposed. Even if they don't sell and continue to rattle around in their huge homes, there will be a feeling of poverty set in that they haven't known since their student days as they come to terms with their financial predicament.
This is likely to become a 'boomers legacy as they struggle to maintain the equity that will be required to take them into the next phase of their lives, the retirement villages that will already be bursting at the seams with other 'boomers ahead of them.
And the cycle will go round one last time as the 'boomers enter the rest homes against a wave of lifting values, rising costs and competition from their own as has been the case all their lives.