Expert Bust #1 - Population Growth

Population growth is not the indicator of demand many believe it to be. At the micro level (suburb or LGA), it is actually an indicator of supply.

The only way a suburb can have significant increase in its population is with the building of more dwellings. That's supply, which is the enemy of capital growth.

 

Rezoning to higher density clearly increases value for a particular property.
But building more dwellings increases supply which should drive down prices.

That seems mutually exclusive, but only if you assume units and houses are interchangeable, which they are not.

If anything, the old house on a big block goes up even more as more and more 'supply' of old houses are taken out to build units.

local population growth doesnt mean much.... unless its sustained and leads to more development and you have something that can be rebuilt. A new house and land development can increase population, but you cant tell what that will do to prices.

 

Does 'growth' mean different things to different people? Growth to a cancer patient is bad (as is spread). Growth in population is a global problem. Economists who argue for perpetual growth are nuts.

 

Not sure of the relevance, since this seems to be about property prices? Growth is growth. An increase. Obviously it depends on what you are talking about thats growing.

Growth in world population is a world problem, but a doubling of melbourne’s population, for example, would result in higher property prices in melb.

though economists usually talk about growth in terms of gdp dollars, not population.

 

Great to see some stats challenging the norm!

Population growth may have a secondary effect though in making local biz more prosperous = more jobs = higher incomes. Caveat would be the type of people that are moving in - whether they drain or add value to the community.

Trainee also makes a good point. You'd think population growth would increase the prices of those properties with the greatest development potential. The end development products may be more likely to suffer from the increased supply, if that new supply can offer an equivalent location at a similar price.

 

I think it still will increase demand, then prices grow when there’s income to support while supply is limited (esp land).

But the other way around, if population decreases, prices really go South with it! Seen Gladstone, some cities in Japan?

 

Playing the contrarian, the reason population growth is a strong indicator is that the ultimate decider of prices is, like any market, an increase of capital within it that grows its market capitalisation.

Increased capital can be people buying holiday homes, increased wages, falling interest rates, or any other reason people have to spend money. Population growth is an important one because it all but guarantees new loans will be required, or at minimum cash redirected from other places.

Suppose a couple move from overseas with their $200k savings and take out a $1M mortgage. That adds $800k to the national debt, and increases competition for property. If enough people increase competition, prices will rise. Now look at the 200,000 people who move to Australia each year. Very conservatively, suppose that results in 50,000 new house purchases (even if they rent, someone had to buy the house). Take an average loan of $500k, thats $25B new bank loans. Suppose all that additional demand lifts the value of housing stock by 5%. that's massive equity to other existing owners. This is again where falling interest rates fit into the discussion. As rates fall, larger loans can be leveraged which adds to the bank books and the equity pile of existing owners.

IMO the missing piece of your article is turnover rate. In a weak market a rental can stay vacant for 2 months. In a strong market, 2 weeks (or even 2 days). Additional stock is never static. Suppose you have 100 houses at 100% occupancy. that's 36,500 days occupied a year. One family requires 365 days of occupation a year, so that says there are 100 families. Idealistic 0% vacancy rate scenario.

• Now suppose weak market, each property spends 2 months vacant a year. that's 30,417 days occupied. That means only 83 families needed a house
• Strong market, 2 weeks vacant a year, 96 families.
• Bursting market, 2 days, 99 families.

Someone looking for a house has more to chose from when turnover is slower. Of the 17 houses, there are likely some very nice ones and some very crap ones. They can snub the crap houses, and with less people to compete with, likely nab a good deal on a nice house. In the bursting market, they have no choice but to buy/rent the only house for what ever is being asked for it.

For a fixed number of houses, the only way to increase the days-occupied statistic is to have more people.

Finally babies don't buy houses but kids do grow up and move out of home. Birth rates are surprisingly consistent in Australia so at a macro level, its safe to assume birth rate = close to move out rate. domestic and international migration stats tell you if they moved out locally or abroad for balance of the equation.

 

Yes JL1, population growth does have merit at the macro level. But not at the suburb level where investors need to buy. And as you rightly point out, vacancy rate is a better indicator then.

I dunno about market capitalisation though. I wouldn't think it will influence the price of individual properties, but simply the total worth of all properties in that market - because there are more.

I believe the ultimate decider of price movement is supply and demand. I can't see how a supply of more properties can increase demand for them or reduce supply of them.

And yes I admit that babies do grow up and move out which places demand on housing. So, if we observe high population growth at the suburb level and if it's via births and if they all move out at the age of 25, then we can expect increased capital growth rates 25 years after the observation - unless the kids choose to live in a different suburb to their parents.

 

You are correct in saying people dont become homeless while waiting for a home to become available, but they do move out further, or move into a share house, or stay with their parents, etc, etc, and wait there. It feels like you are being needlessly pedantic about the impact of population growth. Like most of these things, looking at a single factor in isolation will not give you the whole picture. That is not a novel concept.

 

Moving into a spare bedroom doesn't place direct pressure on property prices like bidding at auction does.

Every metric is examined in isolation initially. This is to determine it's correlation coefficient (CC) to capital growth. I don't look at a single factor, there are 17 included in the demand to supply ratio. Population growth is not among them.

 

Now I am seriously confused..... Sydney boom cycle 2013 ..... driver.....immigration, this boom cycle started in Syd, Western suburbs as it was affordable at this time.

Melb has been number 1 in the country for immigration, and we have seen this market booming.

 

At the macro level there is merit for population growth leading to capital growth. But not at the suburb level. At suburb level it's an indicator of supply because population can't increase significantly if the number of properties is fixed.

Your Investment Property magazine would occasionally ask me for the top ten suburbs for growth. I'd give them the list and then they'd ask for a story for each one. "Jeremy, what's driving growth"? I dunno, I just know auction clearances are up, selling times are fast, discounting is low, etc.

Unless I survey buyers I can't know what it was that was driving the market.

To say immigration was what drove property prices, is to assume cause when all we had was correlation.

I imagine it would take years for new migrants to get a deposit together. In the meantime they'd rent. That would lower vacancies, leading to higher rents, pulling more investors in and encouraging home ownership. Makes sense.

Or it could have been lower interest rates, or wage growth, or increased competition among lenders, job/economic security, change of government, who knows?

 

short of rezoning, when has a suburb ever experienced significant growth (say 20%+) without observing growth in the broader region?

 

There are many drivers for growth, another is catchment areas for schools, change in government FHB grants etc. Its not rocket science, we can actually see what drives markets, I guess we just need to connect the dots

going back to immigration in Syds west, it was in the main professionals from India where inner Syd was far too expensive so they went west.

Also at one point during the mining boom in Perth around 2001-2007 we were number one for immigration/population growth, mining and people moving to Perth helped drive the property boom.
Everything was booming, also regionals and mining towns

When mining boom went bust, population Declined, this all impacted on property markets declining

 

This clearly explains why Geelong property market has soared....... in a nutshell....population growth. Melb too expensive, people moving to regional centres where housing is affordable

How does population affect house prices?

 

Agree and I believe this is what @datageek has covered. Population growth at a macro level Melb/Geelong can drive prices but at a micro / suburb level it is an indicator of supply.
Ie Geelong central population growth will be only due to subdivision / more supply as it’s fully established, but Armstrong Creek and other new estates growth is an indicator of supply of new properties.
The new estates above can still work if there is enough demand at a macro level for this available supply (as you correctly mention).
Some however won’t want to live in estates further out and will demand that limited supply that is in Geelong Central, pushing prices up (all other 1000 potential price factors being equal).