Population growth is not the ‘panacea’ for all things property investment. In fact, it’s often used by many property investment spruikers as the way to get unsuspecting Mum and Dad investors excited enough to hook into a lemon location, and ultimately a lemon investment. However, for some locations it does mean positive things… let me explain.
I recently had a very insightful lunch with the head of the Property Research team at ANZ – a team of very smart men, who I’m sure, are happy to remain anonymous for the purposes of this article. Anyway, the conversation got on to the topic of population growth, and what that means for the property.
Here’s a chart, courtesy of the team at ANZ, regarding population growth forecasts for our major cities by 2028.
Percentage-wise, Perth will lead the way, and, based on these forecasts, is expected to become Australia’s third biggest city ahead of Brisbane. Interestingly, those same models have Melbourne becoming a bigger city than Sydney before the end of this century.
Percentages aside, it’s the number of people forecast to live in our big cities that is of extreme interest to me as a residential property analyst. Melbourne is set to see its city grow by over 1.378 million people over the course of the next 14 years. To put that into dwelling context, assuming the average dwelling accommodates 2.3 people, this means that over the next 14 years, Melbourne will add just under 600,000 new dwellings. They are serious numbers, and if you refer to the chart, it’s not going to take you long to work out that factor in all cities, and that you have a very big pipeline of housing construction for the next decade and a half.
With such a strong demand for residential property looking highly likely, you’re probably asking why aren’t I so bullish on property value increases, given so many uneducated commentators are?
The big reason is: population doesn’t automatically guarantee that property prices will rise. The science isn’t just in the population, it goes deeper than that.
Let’s look at an example that we are experiencing here in Australia at the moment in regards to Baby Boomers retiring, and those who are ‘Sea Changing’ for ‘Tree Changing’. It’s been reported that every week, as many as 4000 people across Australia are turning 65 and moving into the retirement phases of their lives. So, population centres that offer great leisure amenities are very attractive to these folk. These retirement seaside towns and country towns across Australia will certainly see their population numbers swell now, and also in the coming years, but history has told us that property values don’t move much at all. Why is this?
It’s simple, really: these new folk don’t bring with them the income that is needed to push values higher, or sustain values. In fact, most are living off considerably less money than they were living off when they were working.
The same rule applies for areas that offer low income wages, such as the outer areas of large cities, and many rural towns – they simply don’t create a sufficient number of high earning jobs to put pressure on property prices in these locations. The spruikers will tell you all about the plans for a new major shopping centre, or the new schools etc planned, but these too will not grow property values, because the incomes of the majority of people living, or, in this argument I’m making, moving to a location that increases the population, aren’t good enough or aren’t growing quick enough to provide the capital growth that would interest a smart property investor.
However, huge population growth, like what is forecast in our major cities, will deliver some strong capital growth outcomes for some areas, and, yes, those areas are going to be the inner city areas. Why?
High income earners are time poor; they want quick access to their place of employment, and they want all the pickings and trimmings of what inner city lifestyle locations can offer them. And it’s this increased density of population, like what we see in other mega cities around the globe, that produce exceptionally high land values and strong demand for these assets. So those properties that will be in scarce supply, like houses and small developments, will prove their worth in the coming decades, and they are the ones that will deliver results that outperform others for the smarter property investor!
Remember, knowledge is empowering if you act on it.