I always go back to good old supply and demand. Usually it comes down to supply and demand of either or both money and property.
Population growth is no different. Common sense tells you that more people create a need for more housing. Therefore, it will increase the demand for property. The supply of money will also rise with population growth because more people working means more money earnt. More money earnt means more money borrowed. If you increase the supply of money then people will pay higher prices for property. Simplez.
Today I go a little but deeper as to how this helps to push the property market higher.
Population Growth Helps Fudge the Numbers
Did you know in recent times our population growth has been larger than our GDP growth? This is important so pay attention. If we did not have any population growth then per person we would have had a reduced GDP. The definition of a recession is 6 months of reduced GDP.
Population growth helps fudge the numbers because it tells us a story that is more wrong than right. We got told the economy was strong when clearly it is far from strong. The time of writing this article is March 2020. The Corona virus, or history might remember it as COVID19, is showing us just how fragile the economy is.
Don’t worry, they will just figure out ways of increasing the amount of currency that exists to create stimulus in the economy. In the short term it bails out most of the population from going broke however in a few years’ time that extra cash will just inflate the value of property. Just so you know, central banks are creating a shit ton of extra currency.
Certainly, the last 10 years of record population growth has made us look richer that what we actually are. Our stagnant wages growth and ever-increasing living expenses argues is at odds with this.
Inner City versus The Burbs
Population growth effects the city different to how it does the suburbs. The inner city and surrounding suburbs generally attract employment of skilled immigrants. This drives the demand for rental properties and works to push rents higher. If I’m an investor the higher I can rent a property out for translates to the higher price I am willing to pay for that property.
Combine this with the soon to be apartment market shortage (Part 1 of this series) and you get a recipe made up out of increased demand for housing mixed with a decreased supply of housing. That is what you call a multiplier effect.
On top of this highly skilled immigrants attract higher wages and these guys are willing to pay a premium to live closer to work. Higher incomes mean higher borrowing capacities which means higher property prices.
Out in the fringe suburbs population growth has a different effect on the value of land. In my home city, Melbourne, you have population growth out stripping our ability to build fast enough. We can’t build roads, railways, hospitals, schools etc. fast enough. This creates excess demand for land. It also creates a world of opportunity for developers.
Developers can start charging more for each block they sell, that’s no surprise. I’m sure you know about supermarket brands shrinking their product sizes but charging you the same or more? Developers are great at doing this and the state government allows them to do it because it get’s more people into homes. That is why you hear the term “packed like sardines” when people refer to the new housing developments.
This actually drives up the value of land per square meter. It also pushes the rest of the market up.
Why? If you find a small block of land on the outskirts of a major city then drive 20 minutes closer to the city you will almost certainly find houses on larger blocks of land. Where I am, you’re talking 600 square meters. If you calculate the value of the land per square meter on the fringe suburb and use that number on the land 20 minutes closer to the city you will see a large difference in the value of land and its actual price.
Developers know this. They also know buyer will pay more for housing that is in established areas close to established infrastructure such as highways, schools, university, hospitals, shopping centers etc. This land is actually of more intrinsic value to a buyer for these reasons. This pushes the land value even higher.
Immigrants Drive Productivity
For most immigrants that come here we are the lucky country. They have a perspective that the rest of us don’t because we have been lucky enough to grow up in relative prosperity.
These guys work their tails off to provide security and a better future for their families. I’m talking 7 days a week, 10 hours a day, whatever it takes.
Maybe “Immigrants Drive Prosperity” is not correct in the current economic climate. I’ll re-frame it by saying that the hard-working immigrants are making the rest of the economy look better. It’s hard to deny that part of Aussie culture of taking sickies, extended lunches and using unions to protect our rights (even when it’s pushed too far).
This increased productivity helps improve the situation for everyone. The increased work means employers are making extra profit from their immigrant employees. Which means they keep on the other less productive employees – at the very least keeps their wages higher. Higher wages means more borrowing capacity. More borrowing capacity means higher house prices.
Interestingly these less productive employees are the ones that spend all of their weekly income. This spending leads to income filtering through to the rest of the economy.
This has always been the case in this country. We are a country of immigrants and it is why over the decades we have continuously seen scarcity of land in our big cities. We are seeing hard times right now but eventually our record population growth will contribute to the next boom being the biggest we have seen.
In the next part of the series I am going to talk about how weak economic times feed into future property growth. This will be a very timely topic as we are looking at a recession headed by the Corona virus outbreak.
Take a look at the previous articles in this series