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Asset Values vs. Standards of Living #2…

Disclaimer:

As always AND before I go on, I’m not offering financial advice; you should always get qualified professional advice when making financial decisions. What I am doing is letting you know what has worked for me and giving you the opportunity to check it out for yourself. This message is intended to provide general news and information only. Readers should rely on their own enquiries before making any decisions regarding their own interests. Please do not rely on any part of this message as a substitute for specific legal or financial advice. All material is copyright 2008 

You may recall our first blog on this subject back in December 2008, well here is the latest update once again thought provoking… please read on!Last time we left with these questions. Will asset prices grow in the medium to long term in Australia, or will we end up like

Japan?  Will we have to save for our retirement, or will asset growth help fund it? Ok, let’s see if we can come up with some answers.  Firstly assets need to be defined.  There are two classes of investment assets, “passive” and “active”.  Active assets are usually those where part or all of the value of the asset is determined by the persons that manage them.  For instance the price of listed shares and managed funds (listed or unlisted) is determined by the market!  But the valuation applied by the market can depend greatly on the performance of the managers.   

Now a passive assets price is determined solely by the market.  For example works of art.  Their price is not dependent upon “management” decisions.  The two main drivers for artwork are “scarcity” and “desirability”.  On the other hand the main driver for listed shares is future “profitability”.  When we look at property it can fall into both classes, passive and active.  For example a shopping centre’s value will be impacted by management decisions.  On the other hand a residential property will not be.  What are the differences between Japan and Australia?   Land is scarce in Japan. 

Japan consists of 378,000sqkms (.25% of the worlds land) its population is approximately 128 million, or 342 people per square kilometer.   On the other hand, Australia’s land area is 7.69 million/sqkms (5.2% of the worlds land) and the population is 21.5 million, which is roughly 2.8 persons per square kilometer.  In simple terms, land is 100 times more scarce in Japan than here in Australia. 

Land prices in

Japan peaked around 1990 when it’s population was 123.6 million.  Hence

Japan’s population has grown by 3.56% in this time.  On the other hand

Australia’s population has grown by 23.15%. 

It is not the scarcity of a passive asset alone that causes price increases.  It is “relative scarcity”.  That is, it must become “more scarce” as time passes.

Japan’s relative scarcity of land has hardly changed in the last 20 years due to lack f population growth, and hence neither have prices.

The ABS has estimated that

Australia’s population in 2029 could be 30.5 million, or roughly 42% more than now.  Much greater than the previous 20 years. If the percentage increase in population over the next 20 years is the same as the last 20 (that is the increase in the relative scarcity is the same) then one may assume that a rise in the asset price of land would be similar to the last twenty years.  On the other hand if the ABS projections mentioned are correct then one could construe that the asset price of land will increase by more than was the case over the last twenty years. Shares - When it comes to the asset price of shares scarcity is not a factor that effects prices in a general sense. 

But as stated previously as an economy becomes more developed service industries tend make up a bigger percentage of GDP, and cost of production in the manufacturing sector is always decreasing in real terms.  GDP to a very large extent depends on population growth, and the growth of the service sector, which is even more dependent on population growth.  Hence the difference in the performance of the Japanese Stock market relative to Australia’s.  There are other factors as well.  The most important being that Australia is recourse rich and Japan is not! Generally scarcity is not a factor that drives share prices.  In fact, if shares become scarce in a company the tendency is for the company to take the opportunity to issue more shares and raise more capital to grow the business. 

Increasing population is driver for share prices, simply because it drives economic growth, but as the world is “internationalized” there is no guarantee that the money generated by the increased population will necessarily find a home in the Australian Market. 

Smart investors will generally look for the best shares to invest in at the time; the location of the headquarters of the company will become less relevant as time passes.  Most countries have limits on the amount (if any) of land a foreign investor can buy.  Especially residential land, and hence relative scarcity is closely linked to the population growth of the country.  So will Australia’s population continue to grow, and Japans Languish?  Firstly, Australia has an abundance of recourses, including, land, minerals and energy.  Our infrastructure is adequate, but needs improving, especially water infrastructure, as

Australia is the driest continent on the planet. 

Japan does not have a water problem, but is dependent on the rest of the world for energy and most other recourses. 

Japan has always had little or no immigration.  Not many wish to immigrate to

Japan, as it’s language and culture is unique to it, it is hard for new entrants to “fit in”. 

The Japanese themselves also do not want immigration, even while their politicians have been trying to promote it.  Japans birth rate is not as high, nor is it forecasted to be as high as

Australia’s.  It is possible that Japan’s asset prices may continue to stagnate, and it is probable that

Australia’s will continue to rise as our population continues to rise. 

Is their any Dark Clouds in Australia’s Silver Lining?

There is the potential threat that population (and hence economic) growth may be limited by the fact that we don’t have enough dark clouds in the right places to fill our dams.  That is the nations water infrastructure needs to be seriously looked at to guarantee our future.  It may be the countries only credible barrier to sustained population (and therefore economic) growth.  Not that the country is severely lacking in this area.  The issue is that something like 80% of all water that falls on Australian land flows directly into the oceans without being utilized.    While Australia has national communications, energy, and transport networks to support the population and economy, the same can’t be said about water.  This needs to fixed and is likely only ever to be fixed if Australian States act in the national interest, and I’m afraid this is not likely to occur.  Even so each state could improve it’s own water infrastructure, but if climate change occurs as predicted then for our nations own well being, our most precious commodity water should be managed at the national level.  Until next time! 

Yours with Ethics and Passion George Mihos

Melbourne Australia, March, 2009    

Disclaimer:

As always AND before I go on, I’m not offering financial advice; you should always get qualified professional advice when making financial decisions. What I am doing is letting you know what has worked for me and giving you the opportunity to check it out for yourself. This message is intended to provide general news and information only. Readers should rely on their own enquiries before making any decisions regarding their own interests. Please do not rely on any part of this message as a substitute for specific legal or financial advice. All material is copyright 2008 

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