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Does population growth push up house prices ?

Sunday, 19th Jun 2011
Categories: Newsletter

one investment property

In real estate, the word ‘growth’ tends to hold positive connotations. For example, ‘capital growth’ (or more to the point compound growth) signals the big pay off for investors in the end. ‘Growth in rents’ is another beneficial phrase for investors as it means improved short-term cashflow. But what about when the word ‘growth’ is used in reference to population? Well, it can be both good and bad.

As most people know, there is a strong relationship between the property market and population growth. Growth in population drives demand for property which in turn pushes up prices. It’s understandable therefore that when choosing to buy property that one of the key factors to look at would be population growth. In fact, that’s why many investors choose to buy in the big cities as opposed to small country towns.

However, one can’t assume that the term ‘population growth’ always leads to positive outcomes such as increased property prices. This is because demand, whether spurred on by population growth or another reason, does not exist in a vacuum. There is one other key influencer that works hand-in-hand with demand to determine whether prices go up or down. This influencer is supply.If demand rises and supply is tight, then prices go up. But if demand rises and supply is abundant, then prices will remain static or may even drop should supply exceed demand. It is this relationship between supply and demand that tells us that when the word growth is used in relation to population commentary, it’s not always good news for those looking to make a profit from property.

Let’s explain using a common example. These days, there is an abundance of new developments on the outer fringes of cities promoting the benefits of their location with the heavily marketed mantra “growth corridor”. These developers and their agents proudly boast the fact that their properties/land are situated in areas where the population is skyrocketing. Sounds great at first doesn’t it, because as we discussed earlier, an increasing population is generally beneficial for investors.

But what about supply in these ‘growth corridors’? Well, generally there is open land for as far as the eye can see, which you can expect to mean a constant supply of land and newly built properties for many, many years to come. In fact, most new house-and-land estates stagger releases of their plots over a period sometimes well in excess of 7 or even 10 years. That’s without even considering more new developments that could surround the estate in subsequent years, each with their own 7-10 year land release timeline.

Now consider the resulting scenario. Let’s assume you purchase and you were to try and sell your property in 5 years or perhaps even 10 years. You would most probably be faced with a situation where your house is competing with not just a few, but a whole host of newly built homes and vacant lots (which buyers are likely to prefer to your now ageing home). This extensive supply means prices will stagnate, or worse could drop if there’s too much supply to meet demand in the area. As an investor, this doesn’t bode well for your bottom line after all those years of holding the property.

In summary, while population growth is important to create demand for property and drive up prices, it needs to always be analysed against supply. Investors should aim to buy in areas where demand is strong but supply is limited. That’s why as a general rule established suburbs tend to be the preferred choice for many astute investors over new estates on the city fringes.