In the second part of our discussion on residential property drivers, we focus on the demand side: population growth, affordability, job creation, foreign investment and regulatory actions. All these will impact property prices through 2018.
Population growth is a big factor influencing the property market. According to data released by the Australian Bureau of Statistics (ABS) in September, Australia’s population surged by 389,100, or 1.61%, to 24.512 million in the year to March, the fastest increase since 2014.
Most of that growth came via net overseas migration, which increased by 231,900, or 2.4%. Natural increase, a figure derived by subtracting deaths from births, accounted for the rest. Australia’s population has increased by 40% since 1990, providing an underlying boost to housing demand. Net interstate migration (NIM) – the net gain or loss of population through the movement of people from one state or territory to another – can also play a role in driving housing demand in certain areas.
Affordability is a big factor. According to CoreLogic, housing affordability has worsened over the past 15 years by every measure. The cost of buying a house is 7.2 times the annual income of a typical household, up from 4.2 times annual household income 15 years ago. Once again, affordability is not uniform: it is idiosyncratic, depending on prevailing interest rates, individuals’ personal financial situations, and where they are looking to buy.
Job creation also features highly: people tend to move to where the jobs are. CoreLogic looked at this driver several years ago and found that between December 2008 and September 2015, more than two-thirds (66.9%) of employment growth occurred in Sydney and Melbourne – which, it would not surprise you to learn, were also the major growth centres in property values over that period.
Foreign investor demand is also being seen as an increasingly important factor – but again, only in certain property types and areas. A recent ANZ Bank study estimated that foreign investors bought between 35,000 and 60,000 dwellings in Australia in 2015-2016, accounting for between 7%–13% of all Australian property transactions. Up to 25% of newly built homes, mainly apartments, were sold to foreign investors in that period.
“Foreign demand is clearly one of the drivers of the strength in our dwelling investment profile,” says ANZ senior economist Daniel Gradwell. “If this demand were to dry up suddenly, Australia’s construction pipeline would likely be notably weaker than currently expected.”
And as we pointed out in our news item on borrowing and underquoting, regulatory and government actions – such as the recent crackdown on “under-quoting” by real estate agents in Victoria, and the actions by the Australian Prudential Regulation Authority (APRA) to clamp down on interest-only loans for residential property investors – can also directly impact on property market activity.
In short, there are a range of factors, macro-economic and idiosyncratic, working on the residential property market at any one time.
At PMS, that is our opening: because we know the areas where we want to participate very well and we understand the drivers of those local markets.
Call me if you would like to discuss any of these drivers further.