In recent weeks here at Money Weekend, we’ve discussed how the Banking Royal Commission, declining house prices, a declining retail market, stagnant wage growth and steady interest rates are combing to weigh on markets.
However, what could a population boom do to the future outlook of Australian cities?
This could be a vital question for Aussie investors, with our big four banks heavily dependent on real estate, and the shape of future population growth a huge factor in the future of our economy. It’s a hotly-debated topic at the moment, with our politicians making immigration, population growth and infrastructure major points of debate for the upcoming state and federal elections over the next 12 months.
A growing population crisis
Victoria, specifically its capital Melbourne, is a perfect example of why. And the latest in its growth story could have far-reaching implications for Aussie investors…
Melbourne is the fourth fastest gown city in the developed world.
According to the ABC, it adds 125,000 people each year, the size of Ballarat.
And in roughly 10 years, Melbourne could become Australia’s largest city.
2050 is another story all together. Experts predict that by then the city could be as large as eight million people, the size of New York and London today.
Demographer Bernard Salt has given his own warning regarding Melbourne’s population crisis:
‘If we don’t invest, and continue with this rate of growth, then we collapse under our own weight.
‘You end up with a Bangkok situation — where you have an extraordinary level of growth and congestion, and you simply cannot move around the city.’
As stated above, Ballarat’s population is roughly 1250,000. Melton, a suburb on the outskirts of Melbourne is bigger. And by 2031 it’s expected to house 250,000 residents.
Melton is currently pushing for a hospital, and with a substantial population growth on the horizon, it makes sense. As National Growth Areas Alliance CEO Bronwen Clark posed the question:
‘Melton is now bigger than Ballarat, bigger than Bendigo…
‘Can you imagine those cities without a hospital?
Eight new mini CBDs
With the population growing at a fast pace, infrastructure is needed.
Roads are another clear indicator that population and congestion is increasing, causing the State government to increase its roadwork projects.
Currently there are two major roadwork constructions underway to help ease commutes; the Westgate Tunnel Project and the Metro Tunnel Project.
Added to that, work has started on a sky rail and the removal of level crossings.
So there could be some relief for Melbournians in the future, but the effects won’t be seen until at least 2022, when construction is estimated to finish and the networks set to open.
The Victorian Planning Authority believe they have the solution to Melbourne’s population increase.
They want to see an extra eight cities built in the current suburbs of Melbourne. Now, these wouldn’t be the size of the city currently, but they would allow for companies and universities to build their headquarters there.
Kate Roffey from Wyndham City Council believes that Werribee will have a skyline. Stating: ‘It’s obviously not going to be your New York or Sydney style skyline, but we will have some height and scale here. There’ll be people coming here for work and jobs.’
Both the Coalition and Labor agree to the idea of an alternate CBD. It’s been dubbed by both as a ‘National Employment and Innovation Cluster’.
As reported by the ABC, the Victorian Planning Authority see Werribee’s mini CBD the location of research and tech companies, as well as university campuses.
According to the ABC, IBM and Cisco — both multi-billion-dollar companies — are interested in moving into the district.
But it’s not the State Government backing the precinct, it’s a private consortium. They are just waiting on final approval.
Below is an artist’s impression of what the Werribee landscape could look like:
Source: Australian Education City
[Click to open new window]
The idea of building these cities is accessibility. It would make amenities available to Melbournians within a 20 minute radius.
These eight cities would be located in Monash University, Parkville, Fisherman’s Bend, Dandenong, La Trobe University in Bundoora, Sunshine and Werribee.
Melbourne is growing at an alarming rate, and without proper infrastructure liveability will become extremely hard. But if growth were brought to a halt, or worse, allowed to continue without a proper plan, the consequences could be even worse.
Our banking industry has ridden high on housing as our cities boomed. But now that we’re running up against the limits of potentially unsustainable growth, the huge place that the banks have taken in our market has been revealed as a major risk. If we can’t find a way to balance new growth, the entire ASX could suffer as the bubble bursts.
This week in Money Morning
In Monday’s Money Morning, Harje looks at why banks don’t want you to know the simple activities they do on a daily basis. You see, banks don’t lend money. They don’t take your deposits. They’re not the financial intermediaries you think they are. Banks have one purpose and one purpose only: to create money out of thin air. As we saw, a deposit is not a deposit and a loan is not a loan. Banks are in the business of purchasing securities. So, all they’re doing is buying various securities, which adds to the assets and liabilities on their balance sheet. So when banks create money for unproductive uses, demand for goods and services goes up (because there’s now more money in the system), but the amount of goods and services remains the same. To find out more, go here.
In Tuesday’s Money Morning, Harje discusses why US bond yields are rising. Investors believe inflation will be higher in the future. So they’re demanding higher returns from investments. But meanwhile in China, the opposite is happening. Interest rates aren’t rising there, and may even fall. The People’s Bank of China has no interest in putting the brakes on their economy. Pumping more credit into an economy already full of it may be a risk, but Harje argues (with some relevant quotes from others) that this is how many southeast Asian nations have been securing growth, and will continue to do so for at least some time. To find out more, go here.
On Wednesday, Harje opens with the recent drop in the ASX200 and how US investors are looking at a similar situation (a global sell-off is occurring), but then says this is really nothing compared to other declines we’ve seen in the past. If you’re scratching your head over recent declines, look no further than bond yields. The yield of a bond is its annual coupon payments divided by its price. Think of it as the return you get for holding a bond until it matures. When these yields rise (bond prices fall), stocks become less attractive. Why? Because the gap between potential stock returns and what you can earn risk free narrows. Harje poses the question: Why sit in stocks, which are risky, when you can earn a similar return in risk free bonds? To find out the answer and more, go here.
In Thursday’s Money Morning, Harje discussed how two days ago (Tuesday), the Fed off-loaded US$40 billion worth of four week treasury bills (T-bills). They sold another US$25 billion worth of two-month T-bills. Add a costly trade war on top of that. According to former NZ central bank governor, Alan Bollard, tariffs are finally taking their affect. Things seem to be heating up. Above could be what sets off the next recession. A short, sharp decline in stock prices could cause a chain reaction for something bigger: a full blown recession. Won’t happen overnight though. But a likely scenario might involve climbing interest rates, slowing earnings and a big sell-off to spark fears. At that point, human nature takes over. Billions start to pour out of the stock market and into safe assets or even cash. But rather than run for the hills, Harje implores you to stay in stocks. But recession or no recession, correction or no correction, you can’t keep a wonderful company down. To find out more, go here.
In Friday’s Money Morning, Harje looks at how many thought Warren Buffett had just missed the great tech boom of the late 1990s. Everyone thought the old man’s style of investing was dead. The turn of the 2000s would usher in a new economy and a new way to invest. To Buffett this new way of investing (buying anything associated with the internet) didn’t make sense. So he let what seemed like amazing opportunities pass him by. Buffett likened it to someone making a fortune from cocoa beans. He doesn’t know the first thing about cocoa beans. Nor should he. He’s spent no time studying the stuff. If he were to jump into the market with little to no knowledge he’d probably lose a whole lot of money. And that’s exactly why he’s happy to sit on the sidelines. To find out more, go here.
Editor, Money Weekend
PS: In this free report, economy expert reveals four ways you could cash in on the global infrastructure boom. Download now.