How Important Is Population Growth For Capital Growth For Property Investors

Many investors regard population growth as the vital injection required for property price growth. But is this actually the case? Do you need a growing population for prices to grow? Many well established Sydney suburbs have had limited new large-scale development activity but experienced tremendous price growth.

If we look at ABS population growth and ABS price growth index over the last few years in Australia:

2010-2011 – 1.4% population growth versus -1% price growth
2011-2012 – 1.6% population growth versus 0.2% price growth
2012-2013 – 1.8% population growth versus 5.5% price growth
2013-2014 – 1.6% population growth versus 7.5% price growth
2014-2015 – 1.4% population growth versus 8.5% price growth
2015-2016 – 1.4% population growth versus 2% price growth

We can see fairly constant national population growth between 1.4%-1.8% per annum since 2010.
Price growth has moved from -1%-8.5% per annum since 2010.

Clearly there isn’t a direct link from these figures.

Do property investors confuse price growth being directly linked to population growth? What’s actually happening? A population can only grow if there are readily available dwellings to offer housing. This could explain why Victoria has been growing so rapidly over the last few years. They have been leading in new building approvals around the country.

But is this actually positive for investors prices in the short, medium and long-term? Surely having more dwellings in a given location increases the total number of dwelling options, resulting in more housing? More housing options increases supply. More supply in theory should mean greater choice. Resulting in lower prices or even oversupply. But does it? Why have prices continued to increase? Or have they? Maybe this is why in Melbourne houses have grown by more than 17% over the last year versus 5% for units. During this period the Greater Melbourne population grew by 2.4%. Whilst in Sydney houses have grown by more than 19% versus 15% for units. During this period the Greater Sydney population grew by 1.7%. Still no link?

Without new properties how can you house more people in an area with the same amount of properties? Granny flats? Additions? Extensions? Yes. But the real population increases are experienced with large housing estates and new apartment developments. This has been seen in many inner city and fringe locations in both Melbourne, Sydney and Brisbane.

Figures released by the ABS on 30/03/2017 in 3412.0 – Migration, Australia in 3218.0 – Regional Population Growth deal with some of the fastest growing regions in the country. A multitude of suburbs in Melbourne are leading the way with a few in NSW, WA and QLD following. In many of these areas there hasn’t been price growth which has kept pace with dwelling and population growth.

When investors talk about price growth, population has always been one of the vital factors. Government often talks about increasing supply to reduce demand and ease price growth. In theory this should work, but if there is a stream of new demand that can continually absorb this new supply, then price inflation caused by rising construction costs, labour and materials should continue. Inevitably we would view population growth as a small part of the story. Definitely not the total story. It’s like Frodo Baggins and Samwise Gamgee’s relationship in Lord of the Rings. A small part of a big story. It’s not the ring itself. So why has Sydney’s prices grown so rapidly? If there are 1,000 properties in an area, but 5,000 people want to live in that area, then what would happen to prices? Scarcity. It’s this reason why Sydney has grown so rapidly. A build up of demand over a number of years of relative stagnation.

Cash rates at June over the last few years:

2011 – 4.75% cash rate versus -1% price growth
2012 – 3.50% cash rate versus 0.2% price growth
2013 – 2.75% cash rate versus 5.5% price growth
2014 – 2.50% cash rate versus 7.5% price growth
2015 – 2.00% cash rate versus 8.5% price growth
2016 – 1.75% cash rate versus 2% price growth

Scarcity has contributed to making prices rise, coupled with record low cash rates (as seen above). From the above figures a much clearer link can be seen between price growth and the monthly cash rate. Clearly a trend can be seen as the cash rate reduces, prices have grown.

We would conclude population growth isn’t a direct driver of price growth. In fact a very distant link at very best. It’s scarcity of high demand housing and the cash rate, which are far more important.