Adding population into the property sums

Property supply and demand is dictated by population … but there are other price factors.

Summary: In theory, the basics of supply and demand dictate that an increasing population growth will push the “demand” curve higher for housing. That’s true in the longer term, but it is better to assess the “shortage” or “oversupply” of housing in cities based on the difference between new houses built and new arrivals.
Key take-out: For now, don’t bank on population growth as your sole proxy for a property purchase.
Key beneficiaries: General investors. Category: Property.

Does population growth have a large impact on property prices?

It is logical that a high population growth rate will result in greater demand for housing – both rental and buyers. Therefore, many experts point to the growth rates across our various states and assume that the higher rates of NSW, Queensland, Victoria and Western Australia will trump the other cities in Northern Territory, ACT, Tasmania and South Australia.

In theory, the basics of supply and demand dictate that an increasing population growth will push the “demand” curve higher for housing. This should result in bigger gains for cities that have stronger population growth.

Population growth is actually made up of three very different components:

1) Net international arrivals

2) Interstate migration by Australians, and

3) Natural birth-rate increases.

Across Australia, each state is impacted differently by each of the above factors. However, in aggregate we can see the impact on annual population growth. This is seen in the chart above.

As you can see in the chart, Australia is divided into two baskets. The fast growers, which receive 80,000 to 100,000 new arrivals per year (namely NSW, VIC, QLD and WA) and the slow growers which receive 0 to 20,000 new arrivals per year (SA, NT, TAS and ACT).

Population doesn’t correlate to price

Regardless of the relative birth-rates, this is where theory and statistics don’t match up. Analysing the charts below, the slower growing cities have typically outperformed the faster growing cities over the past 10 years. Hence we can say with confidence that the correlation is weak. But this doesn’t answer why?

The answer is that we build more houses in the states that receive the most people. Therefore, whilst demand goes up, the supply goes up with it.

This is not exactly relative though, because the state-by-state population numbers are not consistent. For example, NSW and VIC have the largest populations, hence it is normal for the natural birth rate to be bigger because they are coming off a higher base.


Re-thinking the way population impacts property

Instead of just using population growth as your proxy, it would be much better to assess the “shortage” or “oversupply” of housing based on the difference between new houses built and new arrivals. To do this, we know that each household in Australia has approximately 2.4 people living in it. If we have 100,000 new arrivals, this would imply that we need approximately 42,000 new houses to meet this demand (100,000 ÷ 2.4).

Using this knowledge, we can make much better decisions about the true impact of population growth supply/demand on future housing prices. For example, Victoria has plans to build 47,853 houses/units this year when the population is only expected to increase approximately 90,000. This seems to be too many houses per person. On the other hand, Western Australia is only building 25,521 houses/units while their population should grow by 80,000. This equates to a shortage and should inevitably push the demand for existing houses higher.

Yet not every family that arrives into an Australian city will buy immediately, hence it is not correct to assume they will. The more likely impact is that they will contribute towards rental growth in the first instance.

On this note, I believe that rental growth is a very good thing for property owners because it underpins the price growth. This is much the same as earnings growth for a business will result in higher share prices. Sometimes it is not easy to see the relationship between rents and prices on a daily basis, but let me assure you that they inevitably find equilibrium.

Therefore, in the very long term, population growth will eventually win out as an important factor for property growth. This is especially true given we have a tendency to hug around major capital cities (despite Australia’s vast amount of available land).

Therefore, once these cities “fully mature” and cannot facilitate further building then property growth will correlate more closely to this population growth. But for now, don’t bank on population growth as your sole proxy for a property purchase.


This article was first published in the investment newspaper, Mr-Market. Scott Dixon is the founder and chief editor, and specialises in providing investment insights.

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