Despite a near recession in the U.S., a global credit crunch and rising fuel prices, the global economic outlook remains positive in the absence of a Chinese recession.

The Australian economy operates in approximately 8¹⁄2 year cycles.The last dip in economic growth occurred in mid 2001, suggesting that the next might occur in 2010, although a true recession is not anticipated. The New Zealand economy is still experiencing economic growth although the slowdown has been greater.

Whether or not Australia slides into recession will be influenced by corporate sentiment and the investment decisions taken by companies over the next 18 months.The potential for New Zealand to move into recession may be greater.

Business models that remove property from the balance sheet in favor of leasing are becoming increasingly popular. Given the trend towards leasing commercial property and the need for diversified investment options,investment in property trusts is forecast to double over the next 15 years. As a result, significant growth will occur in the commercial and facilities management areas.

Shifts in the Housing Market

Despite rising prices and population, [Australia is] not building enough dwellings to keep pace with demand.The housing market typically moves in a 15-year cycle which suggests that the next major boom is not due until around 2018. While there have been some predictions that there will be anoth­er housing boom in the near future because supply continues to lag behind demand, it is unlikely that dwelling prices will continue to rise significantly. Some commentators are predicting that the value of homes (currently 4 times household income) will reduce to the norm of around 2.5 times household income within 10 years, but that only half of Australians will own their own home by 2050 (down from 64.1 percent as recorded in the 2006 Census). Coastal areas, particularly the Gold Coast (a city and area in the southeast corner of Queensland) will be the main growth areas.
Institutional investors such as superannuation funds¹ and life insurance companies will begin operating resi­dential property trusts. Changing demographics and values mean that consumers will want smaller homes with more private spaces, greater energy efficiency, smaller environmental foot prints, water recycling, and greater proximity to services and transport. Population density will increase. Developments will be increasingly of a community nature and will include facilities such as child care, shops, and sporting centers.

The Australian and New Zealand economies— can recession be avoided?

Property currently dominates the value of Australia assets, which is not surprising given that the value of property generally increases in line with the wealth generated in society. During 2007-08, the total value of real property was around AUD6.07 trillion (US$3.89 trillion) in Australia, and around NZD0.9 trillion (US$0.47 trillion) in New Zealand. In both economies:

1/8 of total property stock is traded each year;
the property market is growing fastest in coastal locations;
residential real estate represents 2/3 of total property value;
commercial, industrial and farmland represents 1/3 of total value;
the land component represents 2/3 of the value of a home while the building itself represents just 1/3 (a recent reversal of the historic norm);
housing represents 55 percent of household wealth; and
if the land component is removed, the total value of commercial buildings is approximately equal to the total value of residential buildings.

[The historic cycle Australian recessions aside], a true recession is unlikely either in Australia or New Zealand as economic growth is still occurring, albeit at a slower rate.

Impacts in the property sector
In the favorable international investment environment, the world’s top companies are seeking to achieve annual capital returns of 25 to 30 percent. Returns in this order are generally not attainable through direct property ownership so business models that remove property from the balance sheet in favor of leasing are becoming increasingly popular.

Property trusts currently hold around 6 percent of the total value of commercial property in Australia.While property trusts generate average returns of around 13 percent, or around half of the return sought by top companies, conventional investment strategies rely on some level of diversification, giving rise to significant demand for lower risk, lower return investment classes such as commercial property. Given the trend towards leasing commercial property and the need for diversified investment options, property trusts are forecast to double over the next 15 years. As a result, one significant growth area will be the commercial and facilities management area, which is currently worth around 1 percent of this sector of the market.

Housing Affordability—Where is it Going?
House prices have more than quadrupled in most Australian capital cities over the past 20 years. In 1988, the median house price was 1.5 times household income, increasing progressively to be double household income by 1998. In the past ten years, the increase has been more rapid, and today, the median house price is more than 4 times average household income.

Some commentators predict that only half of Australian households will own their own home by 2050 (down from 64.1 percent in the 2006 Census).This has impli­cations for real estate businesses˜properties will still be traded but there will be an increasing need for management services.

All businesses operate within a broader social context and are affected by the continual evolution of thinking, attitudes and values of different groups in society. The rate of social change is greater now than at any time in the past. As younger generations come of age and older generations achieve greater longevity, we find ourselves living in a time when many different generations live side-by-side in a complex and socially diverse society. Gone are the days when products, services and employment conditions could be provided with only one type of consumer or employee in mind.

The process of rapid social change represents a challenge for real estate business­es to remain relevant and to serve the needs of a number of different types of consumers and employees simultaneously. Businesses that do not recognize and understand these changes will find it increasingly difficult to predict and to adapt to the needs of new generations into the future.

The New Consumer
Consumer research suggests that the values and thought processes of younger generations are in a state of change. Many are starting to wonder why we need an economy based upon an increasing population when we face issues such as water shortage and global warming. Greater emphasis on quality of life is likely.This will evolve via social rebellion from traditional values to materialistic values and subsequently, to post materialistic values. Ultimately, it will also influence the attitudes of older cohorts. People will no longer sacrifice lifestyle for work and housing debt. Work/life/office space will become more integrated. There will be increased flexibility in the workplace, both in the number of hours worked and more people working from home. As more people embrace technology, they will increasingly want more transparent and objective information. In the post materi­alistic world, people will ask deeper social questions, and will think beyond pricing and packaging.

Conclusion
The changes and movements in the real estate sector reflect change occurring more broadly in Australasia’s socio-economic environment. Real estate business does not occur in isolation. It is a microcosm of the broader economy and reflects the socio-economic changes within our society. The Real Estate Institutes of Australia and New Zealand, and the state and territory Institutes across Australia, pride themselves on offering real estate agents the opportunity to engage in devel­oping professionalism and best practice.Together, agents are able to confront the threats and opportunities presented by a changing business environment, in order to build stronger and more dynamic businesses.

Excerpts from “Real Estate Trends Focus Group 2008,” conducted by the Real Estate Institute of Australia (REIA). For a PDF version of the full report, go to http://www.reiaustralia.com.au/new/index.

1

http://www.papers.ssrn.com/sol3/papers.cfm?abstract_id=1134605
2

http://www.imf.org/external/pubs/ft/weo/2008/02/index.htm

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