What’s really driving Australian property prices?
I’m sure I’m not telling you anything new when I say that there’s a diversity of outcomes in the Australian property market right now.
This chart here sums it up. It looks at growth in Australia’s capitals since 2011.
As you can see, Sydney is thumping ahead. Melbourne is going great guns too.
Brisbane and Adelaide are growing, steady as she goes.
And in Perth, prices peaked around the end of 2014, and have been drifting lower since.
Now you’re going to hear a lot of theories about why the capitals are on different tracks. It could be the vibrancy of each state economy. It could be planning regimes. It could be the resources boom and bust.
But at the end of the day, it really comes down to one thing:
Population.
There was an interesting report out from the Macrobusiness guys comparing population flows with dwelling approvals in all the capital cities.
What they found was that the connection between property prices and population stuck out like a sore thumb.
Take a look at the national chart to start with. Population growth is the green line, while dwelling approvals, commencements and completions are the others. For now, let’s just look at how the green line tracks against the others – how population is moving against new supply.
At the national level, you can see that population growth peaked just after the GFC. It has come off a little since then, but still remains around historical highs.
That’s a strong plus for property prices.
At the same time though, construction activity is picking up, and is also way into ‘records high’ territory.
So that might take some of the heat out of prices going forward.
But as we keep saying, the national picture is only so useful, and you need to dig a little deeper to figure out what’s happening on the ground.
So we can rerun this chart for each of the different states. This is what the results look like:
New South Wales
You can see here the massive surge in population growth, which coincided with a collapse in construction, although that has picked up again recently.
For all the surge in construction activity in Sydney, it still looks like it’s going to take a long time to unwind the housing shortage there, and prices look unlikely to settle soon.
Victoria
Victoria has been the construction leader, mainly through high-rises. However, population growth continues to be strong, suggesting that market remains balanced.
Queensland
In Queensland, the chart is a little more troubling. Queensland has been adding a lot of supply recently, but population growth has been slowing considerably.
This, I think, is why you hear people fretting about an apartment oversupply in Brisbane. Supply has been strong, but it’s not clear that there is the population growth to meet it.
Western Australia
Over in Perth, the story is even worse. There the construction boom is unwinding quickly, however a lot of the supply is already on the market. That’s happening at the same time that population growth falls to some of the lowest levels this century.
This helps explain why prices are falling in Perth, and while there’s another year or so of hurt already in the main line.
South Australia
In South Australia, population growth is also coming off, but we never saw the construction boom there that we saw in other states.
Population and construction are moving together, suggesting sustained and stable price growth is the most likely scenario.
The Northern Territory
Like Perth, we’ve seen a marked slowing of population growth in recent years. Construction has also come off, but it remains relatively elevated.
This suggests that until we see population growth return or construction start to ease, dwelling oversupply should continue to keep a lid on prices in the NT.
The ACT
And just for completeness’ sake, here’s the ACT.
Not all that much to say here. Population growth and construction remain elevated, but nothing crazy. They seem to be moving broadly in line, suggesting that property prices should be growing in line with incomes.
Population Matters
We might hear talk of the different factors driving each state market, but really, when it comes to property, it comes down to supply and demand. Demand is mostly about people numbers, and if you look at where population growth is strongest, it’s no surprise that that is also where price growth has been the most vigorous.
And when we’re talking about different state economies, we’re kind of using the economy as a proxy for population growth.
When the economy is doing well, a state starts pilfering population from other states, and the property market tightens in response.
So look out for it. Nothing matters like population.
Food for thought.
Are these markets looking ‘glutty’ to you?
Aman Sidhu says
Thanks for sharing, worth reading entire story.
JD says
Low interest rates also helps – but is also whacks you at the back end. Back in the 90’s politicians and media alike began to focus on interest rates so it became “bad” when rates went up but “good” when rates went down – this was solely targeting ordinary mum and dad’s with mortgages (a hefty proportion of the population). Short term great, over time though these same “ordinary” people realised that low rates meant they couldn’t save squat form their bank so had to seek alternative investments. Which way would they go – Shares or Property? Shares were too risky – most wouldn’t even know how to buy shares let alone monitor the share market. But, alas, there’s always safety in houses…so that’s where these “ordinary” people went from 2012 onwards. Pent up demand? More like, get into property investing before my neighbour does…
ron goddard says
population governs everything; food prices, housing prices etc. etc. house prices seem to be the lifeblood of oz at the moment. they govern how we think, how we plan and how we live. it is a separate universe almost. given that every aussie wants to own his/her own home outright makes complete homeownership a dream for most. glutty? maybe the answer lies in putting our resources into other areas like manufacturing or maybe we could have less population(thats the thought of the n.w.o.).
in any ‘time’ there are those who race forward with wonderful ideas of ‘progress’. in housing its unending construction which, undeniably, drains our economy. if one looks objectively at the components of construction of any type one can readily see where most of the ‘components’ derive: overseas, and we have to pay for these ‘components’. therefore they are a ‘drag’ on our balance of payments, so that in a boom construction ‘time’ the drag is enormous. internally its great for business, but the inevitable credit ‘expansion’ might ‘kill’ us…more especially so if interest rates march upwards, then that ‘glut’ turns into a monster that bankrupts. already the four major banks have ‘off sheet’ balances of over AU$1.5 trillion to enable the borrowing for construction, and i guess that most, if not all of this,is at low interest rates : inwards around 2.5% outwards (to borrowers from banks) 4.5-5% and the 2% margin makes the banks better off. lol oh the lunacy of it all! but one day the piper will play a different tune and we will all have to follow him. another point is that if the ‘singles’ (30% of the population) lived together maybe there would be 15% more lots of accommodation available. this may happen in time. cheers, ron
Nic Zoom says
Agreed. More than anything its a case of Supply and Demand that drives prices. People say that prices are over-inflated compared to the rest of the world, but it is the best place in the world to live and as such it should have higher prices. The cost of developing land is governed by the local authorities and if they ease up on the cost to develop property then the developers should pass on the savings. Perhaps a nice thing to add here is if developers use 100% locally manufactured materials for construction and have receipts and orders to prove this then a GST reduction to the developer as a reward could help the economy and the home buyer at the same time. 100% Aussie homes could also be a good marketing tool, however the manufacturers will need to work hard at producing goods that are at competitive prices however a GST reduction could offset price differentials on some manufactured goods. These measures would need to be implemented at the state level as different conditions are present in each state so different schemes can exist to target different states and markets.
jac says
I think you might like this CNBC article. http://www.cnbc.com/2014/03/27/5-countries-that-gained-the-most-millionaires.html
Australia was forth in line to gain the most millionaires, where are they moving to and buying? my guess Sydney and Melbourne
Tom says
Jon, it is all your fault.
By encouraging Dymphna and others to educate us Aussie Baby Boomers in the real, factual, logical fundamentals of successful real estate investment, you have forced such a huge lump of the Nation’s personal savings into this very satisfying market – and there is a lot more still to come, out of equities and other short term, attention-demanding, less secure/profitable investments.
When this geriatric flow does slow down, the ‘Demand’ side, and so price pressures too, will ease off somewhat and the less cashed up young folk may get a look into the market, unless we continue to be swamped by economic refugees, rather than by hard working but impoverished ‘Boat People’.
In the meantime, those young people will still be hankering after a slice of the property market and could be lured into cooperative investment systems.
Back in the late Seventies, after the 74 crash I guess it would have been, Fred Johnson & Brendan Whiting ran an investment property system where investors could, by paying either up-front or by instalments, buy into what I assume were ‘Trusts’ which would collectively purchase larger properties. These would be sold at a predetermined time, winding up the ‘Trust’, with distribution of the proceeds. Maybe some of your disciples could organise a nice little JV sideline for themselves, following similar ideas and benefiting from the management costs. It would certainly be good for the would-be young investors who have either not heard of, or feel incompetent regarding Mark Rolton’s system. Hint start with Social Media advertising to find the initial investors. Their grape vine will do the rest.