As property developers and investors, it is critical to understand the factors that influence property growth.
A wise man once said “Buy land, they’ve stopped making it.”, and while the factors contributing to growth in property prices aren’t all as simple as this, the basic principle of this statement is at the heart of things.
The pillars of growth are:
- population trends
- infrastructure investment
- employment diversity
- education and health facilities
- lifestyle desires.
These pillars of growth underpin economies and fuel demand by residents and businesses for usable property.
Population growth directly affects the growth rate in property prices. As population grows so too does demand for goods and services in a market.
As of April 2017 Australia’s population is 24.4 million people, with a population increase of one person occuring every one minute and twenty two seconds.
Australia as a nation is also experiencing what is known as “coastal drift”. Over the course of the last 100 years the rate of people moving from rural regions to coastal and capital regions has increased.
This trend is expected to continue as people move in search of education and employment diversity, business opportunities and lifestyle.
When understanding the impact population has on property growth we may consider that while our nation’s population and markets continue to expand our country as land mass remains constant.
Supply and demand
The supply and demand phenomena will go on forever. But in property terms, what does it mean?
Supply of property in a residential market means the total stock of dwellings available in that market. Demand in a property market relates to the number of households which need a roof over their heads, and how that may change over time.
Generally as population grows so too does demand for goods and services, in particular housing and infrastructure. As demand for these goods and services increase so does price.
If a population shrinks so does the demands for goods and services which may now be in over-supply. Ultimately this causes prices to go down.
If the rate of supply outweighs demand the price for goods and services will go down.
House and land properties will always grow in value because of increasing population growth and limited land content.
Apartments in residential towers are considered higher risk because a market place can become over supplied within the same land content (as buildings are built higher and higher creating more dwellings).
Infrastructure refers to the general facilities and services required by a community and for general economic production, including:
- transportation, including road systems, rail networks and domestic and international airports
- power sources such as gas and electricity
- telecommunications and communications services including telephone, mobile and internet networks, radio, free-to-air and pay television networks
- water supply and sewerage services.
Governments allocate infrastructure spending based upon population growth forecasts regions and communities across Australia.
Areas where there is significant government infrastructure investment earmarked for the next 20 years are the ones to watch for strong and sustainable growth.
People need to work, and economies underpinned by multiple industries create more opportunities for both skilled and unskilled workforces.
Regions with industry and employment diversity tend to maintain steady growth rates while those typically reliant on one or a few industries risk high growth during industry boom periods and low to negative growth during down periods (or if work runs out).
Capital coastal regions (metropolitan centres) have historically provided investors with more sustainable and consistent long term growth rates (7-10%+ per annum average over 10-20 year cycles).
Regional epicentres tend to experience periods of high growth and yield (higher rental incomes) during industry boom periods (primary resources for exportation) but often experience severe negative growth in times of low industry demand and community unemployment.
Depending upon your investment strategy and investment life cycle (short, medium, long term) you may want to research or compare regions and growth cycles.
Areas with a combination of primary, secondary and tertiary education with choice of facility provide sustainable population growth and generally add value to property in the area.
Residential property developments within walking and short drive distances to day care centres, primary schools and secondary schools tend to create a more family orientated environment.
Standard of living
People tend to relocate to areas which provide a better standard of living for themselves and their families. Factors which affect a person’s general standard of living are:
- reasonable access to employment and education
- comparable income levels and reasonable living costs
- fair market price of goods and services in an area
- a desired standard of dwellings (typically of greater quality and cost effectiveness to their previous location)
- a safe and secure environment with strong community bonds, networks, clubs and associations
- consistent weather – typically in warmer regions which improve options for extra curricular activities and entertainment.
Regions which offer all or many of these factors achieve greater long term property growth than those lack them.
The overall health of the economy can have short to medium term impact on property cycles and the growth in property prices.
Inflation is the increase in the prices of goods and services in an economy and is measured by examining a basket of goods and services from time to time using the Consumer Price Index (CPI).
As the price of goods increase so too does the cost of living. As fixed household budgets spend greater amounts on the usual items, household budget surpluses diminish reducing the overall demand for many other goods and services not necessarily required to maintain a secure standard of living.
The Reserve Bank of Australia closely watches the relationships between inflation, consumer demand and in particular consumer credit spending. As inflation pushes above the ideal equilibrium the Reserve Bank may impose a rise in interest rates to curb consumer spending and credit ratios.
This can ultimately impact the affordability of housing (especially for first home buyers) and therefore underlying demand and price growth.
A strong economy manages to balance the inflation-employment see-saw. As unemployment drops and more Australians are employed and producing greater household incomes, the general demand for goods and services increases.
Strong employment figures generally provide for strong consumer sentiment driving business productivity and the ongoing need for more skilled workers.
During such periods, income earners spend more on luxury items but are typically proactive in making investments in shares or property markets.
There’s always a direct correlation between the demand for property and interest rates. While interest rates impact the affordability of housing they most affect Australians in their own home.
As inflation rises and the Reserve Bank increases interest rates, the cost of paying the mortgage on a home becomes greater (unless we fixed interest rates on our home loans).
The interest cost on an investment property, however, is a component of the tax effectiveness of the property. Meaning that as interest rates rise so to do the tax deductions on an investment property.
Ultimately, an interest rate rise may lessen the demand for property therefore reducing property prices or at least price growth rates.