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Sep 05, 2011

Big Australia vs. Small Australia

- What it means to you.
By Bill Zheng, November 2011

Bill Zheng is the founder of the Investors Direct Financial Group, which is headquartered in Melbourne with an office in Sydney. The company comprises 5 divisions: 1) Investor Education 2) Property Advisory 3) Financial Planning 4) Mortgage Solutions and 5) Property Management. Bill was educated in China, Australia & USA and is fluent in both English and Chinese. His tertiary education includes Civil Engineering at South China University of Technology, Computer Science at RMIT, MBA at Monash University, Finance at the Securities Institute of Australia and numerous investment related courses in Australia, China, Hong Kong & USA. After a long corporate career spanning positions in Australia, Hong Kong, China, USA, Canada & Northern Europe, Bill left PricewaterhouseCoopers Melbourne in 2000 to found Investors Direct, initially as a mortgage broking business solely servicing property investors. In 2005, Bill became the highest ranked mortgage broker in Victoria during the first ever national survey of mortgage brokers, before then becoming a mentor to many of the MPA Top 100 mortgage brokers in Australia. He holds an Australian Credit Licence (No. 402950). Bill soon became known for his unconventional views on property and finance. He not only personally executed numerous property strategies himself but also actively educated tens of thousands of property investors across Australia. Bill was given the honour of being the Chief Judge for the inaugural Australian Property Investor of the Year Awards in 2008. With his practical knowledge and hands-on experience in real estate investment and finance, Bill has been invited to appear on property shows on TV and radio in Australia. He regularly writes for a variety of property investment magazines, newspapers and online investment portals and is one of the most sought after presenters on property and finance in Australia and South East Asia.

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Big Australia vs. Small Australia

- What it means to you.
By Bill Zheng, November 2011 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 Id like to talk about how to go with the trend rather than against the trend 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 would like to see our population 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 level of growth is sustainable to whether wed be paying higher taxes, and even more extreme scenarios such as cultural shift and racial domination. Im 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 societys 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 cant even apply logic 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 should 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 attention to logic and good reasoning. You will benefit more in life by putting 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 each year. Some years have been slightly higher and other years slightly lower. 40 years ago our population was 12.6 million people. Today it is over 22.7 million. If we continue 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 wont have enough compulsory superannuation. All these retirees will mean that we will need more workers to pay enough taxes to support the 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 dont seem to have enough people to produce them all. Recently the heads of many major mining companies have been fiercely critical of the governments red tape that restricts them from bringing workers 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. Its 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 Australias population? In my opinion two main factors: influence and emotion. Lets go through them one at a time. Influence We all know that it is the government who decides whether we will increase or decrease immigration on an annual basis. But what influences the governments 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) are more likely to dominate business decisions. 2001-2011 Investors Direct Financial Group Page 2 of 6

In a democratic society, economic 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 groups such as businesses, especially the largest businesses. Hence you tend to see governments in a democratic society bailing out the too big to fail businesses (such as what happened in the US and Europe), and not necessarily acting for the little people who have less direct influence. This is not a statement by the way of what is good or bad, it is just the facts of the way different systems work for different people. So here is the key question: do you think the largest businesses in Australia want more migrants or fewer migrants? Lets look at the needs of the largest businesses and organisations in Australia: Do you think the mining companies want more workers to deliver their contracts? Do you think the largest airlines want more passengers? Do you think the largest retailers and shopping centre owners want to have more people shopping? Do you think the largest property developers and builders want to have more people buying their properties? Do you think the largest banks want to have more people paying interest? Do you think the largest universities want to have more students? Do you think the largest pharmaceutical companies want to have more people to buy their drugs? Do you think the largest religions want to have more followers? As you can clearly see, politicians will be constantly under the influence of these powerful self-interest groups to continue increasing the population. Now what do you think 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 how many of the political 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 groups 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 persons influence is limited unless its coordinated via larger groups, so even when their opinions are quite logical and justified they unfortunately simply dont have the economic influence to lobby the 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 Small Australia, but unfortunately this is just 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 Im 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 dont have to like everything that is happening out there as an investor, but we can benefit from the trend even if we dont 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 emotion. 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 seem to have long gone. The best values to hold onto to win 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 how this sentiment may develop over the next few decades. There are quite a few countries in the world where the majority of 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 this country, all of us are migrants from one generation or another; Today, half our population 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 generation migrant myself. During the past 23 years I have lived in Australia, I can honestly say 2001-2011 Investors Direct Financial Group www.investorsdirect.com.au Page 3 of 6

that I have 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 may not be aware of how much all first generation 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 this applies to the average 400,000 migrants coming into the country each year. This migration flow started 5 years ago. Give it another 5 years, and a whopping 4 million new migrants (a figure equal to the entire population 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 friends and family from coming here. Hence I can see the trend of public sentiment being on the side of a Big Australia, and you know how politics will play out according to that trend.

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 dont want to be known as the guy who started the Big Australia vs Huge Australia debate in Australia .) Lets define what I mean by a Huge Australia first. If a Big Australia means adding 14 million people 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 population 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 living in China about the idea of a Huge Australia, Im 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 wouldnt 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 would probably still call us a Small Australia even if we reached a population of 50 million people, because he would 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, dont you? Imagine if the US had only 22 million people living 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 US in land size! Now why do I see the idea of a Huge Australia as not entirely crazy? Although currently I havent 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 on average each year. This converts to 1.8% increase of the existing population. All you have to do is to add another 0.2% to take it to 2%, 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% increase per year in population is not much different to the 1.8% we are doing right now, and it is still way below the threshold of noticeable difference. This is similar to our inflation figure. It is hard to notice price increases if theyre less than 3%. 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 have the means to do it without the majority of the public even noticing the difference. The real question is not whether Australia wants to become Huge. In my opinion, a more practical question probably should be whether Australia has 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 cant fully explain it. The changing of the seasons is similar to the way in which countries rise to become economic powers and then fall again. If you look over the past 500 years, there have been 9 countries which rose to a level of power which enabled them 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. None of these countries escaped their decline and each gave way to another country to take on the role of leading the world. We are now well into the Asian Century as our Prime Minister has recently put it. I would 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 economic and political 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 barrier to efficient communication still remains - the time-zone barrier! 2001-2011 Investors Direct Financial Group Page 4 of 6

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 Europe or America. This is one of the main reasons why so many multinationals strategically set up their Asian Pacific headquarters and design capacity in Australia. Australias 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 think Australia will increasingly be forced to take on some kind of leadership role quickly, as the West 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 positioned 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. With the decline of America and Europe it has got to be someone elses turn this time. If not Australia, can you pick another country in the West which is more perfectly positioned and ready to prosper right now than us? I cant. 3) It may be in Australias interest to become Huge. Have you noticed that Australia has been busily shipping all the resources our 22 million people dont currently need overseas? In other words, 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 todays price or allow more people to work for you on the land forever? This is one reason why you often see most of the larger land development projects being joint ventures between the farmer and the land developer, 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 large piece of land that has lots of potential. Why wouldnt you allow more people to come and work on your land, instead of selling it off to overseas buyers just because you dont have enough domestic demand? This is one reason why I think it is in Australias best interests to attract the finest talent from around the world to develop our more internationally competitive industries while we are selling down our resources. Selling down our resources is only a temporary cash flow strategy; it is not a long term survival investment strategy.

The Huge Opportunity for property investors

Simply put, there has never been a 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 people into a major city like Melbourne or Sydney over the next 40 years, or between 100,000 to 200,000 per year. 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 the 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 wont insure the banks to lend money to someone who hasnt yet established a reasonable work or credit history in Australia. Most new migrants tend to live around other past migrants from the same ethnic community for support. Most migrants give high priority to their childrens 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 few 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.

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Summary
It is my view that Australia is going into a golden era of prosperity. And home owners and property investors stand to benefit greatly from it. As a general rule, you are less likely to lose in investing if you follow where the banks put their money. For example, the banks followed the baby-boomers who were the largest income generating group over the past 15 years. The suburbs they lived in did very well and some are even over-valued today. Now with the baby-boomers retiring, the banks have moved their focus to the next income generating 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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