Australia’s love affair with property is simply undisputed.
Whether it is around the suburban ‘barbie or in the boardrooms of Circular Quay, we just can’t get enough.
But what really drives residential property markets?
How does the Australian property market function and what contributes to the ups and downs of the sector.
In our pursuit to try and cut through the hype and media, The Urban Developer has asked the industry’s experts to help us better under the factors that drives Australia’s residential property markets.
We’ve distilled it down to six major areas to watch:
1. Population Growth
According to the Australian Bureau of Statistics Population Clock, Australia’s population topped 24.3 million in 2016.
Our population growth, which equates to an increase of one person every 1 minute and 24 seconds, is by far the most significant factor in growing property values.
So what do we need to know about populations to better understand how they are growing and why this is important for property markets?
Whether you’re looking at the whole nation or a regional town, the principal for determining the characteristics of a changing population are the same.
Broadly speaking, there are three main factors at play:
- Net Interstate Migration (NIM) – the net gain or loss of population through the movement of people from one state or territory of usual residence to another.
- Net Overseas Migration (NOM) – the net gain or loss of population through immigration to Australia and emigration from Australia.
- Rate of Natural Increase (RNI) – the net gain or loss of population through the crude birth rate minus the crude death rate.
Something else to consider…
Australia has one of the highest population growth rates of the developed world (approximately 1.4% in 2016) which equated to over 330,000 new people in the year to June 30 , 2016.
And one last point, before I get pulled up by the demographers out there…
Net Interstate Migration (NIM) is only relevant when looking at a particular state’s population, as opposed to the country as a whole!
2. Job Creation
It’s pretty hard to buy a house without a job, so it is no surprise that being employed, and more specifically, job creation, is a key factor in driving property markets.
We hear plenty of chatter about interest rates being a key driver of home values, which is partly true. However if this was the case entirely, then we would would have seen a similar level of growth in property values across the country.
Between December 2008 and September 2015, more than two thirds (66.9%) of employment growth has taken place in Sydney and Melbourne which have been the major growth centres when it comes to property values.
Data research guru Cameron Kusher of CoreLogic RP Data gave his take on the data, believing that home ownership is “generally underpinned by secure employment”.
“Low interest rates have been a key driver for recent growth in home values; however, growth in dwelling values has been narrowly based geographically whereas interest rates are the same across the country.
Given this, there is clearly more to current housing conditions than low interest rates with employment as the key driver,” Kusher said.
Every five years, the Australian Government conducts the National Census which is a comprehensive survey that measures the various character traits of the Australian population.
The Census tells us everything we need to know about the demographic composition in Australia, such as:
- Age Composition – the average and distributed age of the Australian population.
- Household Size – the average number of occupants within a household.
- Household Income – the average weekly income derived from employment or business.
- Home Ownership – whether people own their home or rent it, and whether they have a mortgage.
- Ethnicity – the ethnic composition of a particular household.
- Dependency – whether a household is a single person, couple or family.
- Occupation – the type of employment of a particular individual or household, such as professional, technical, healthcare or construction.
Why is this important?
Well, areas with a younger age composition that is of an Asian ethnic persuasion are more likely to prefer apartment stock, while as young families on an average household income are more likely to prefer traditional house and land offerings in the suburbs.
The demographic composition of an area – what it currently is – combined with the changes in area – what it is becoming – will drive demand and therefore property prices in a particular area.
While engaging a demographer to undertake this analysis is an expensive exercise, you can derive a basic understanding by checking out Domain’s Suburb Profiles here.
As Australian cities grow in population, our governments have a growing requirement to supply new infrastructure that supports our way of life and social and economic systems.
Beyond this, major infrastructure investments support significant job creation across both ‘white collar’ (e.g. office workers) and ‘blue collar’ (e.g. construction workers) industries.
The current infrastructure boom in Sydney is a prime example of this.
According to the Prime Minister’s office, an expected 9,000 jobs will be created by the construction of the Western Sydney Airport by the early 2030s and a further 60,000 jobs in the coming decades.
These jobs will be in aviation related services, but also in sectors like security, education and training, catering, retail, warehousing, administration, communications and ICT.
Construction of the airport will generate $1.9 billion for the local economy, with a further $400 million across the rest of Sydney.
So why is this important?
Jobs drive housing markets!
Infrastructure is a broad terms that can also include:
- Transport Infrastructure -Airports, highways, tunnels, rail, bus, ferries and trams.
- Health Infrastructure – Hospitals, research and training centres, medical centres.
- Education Infrastructure – Schools, universities, colleges, training institutes.
- Social & Religious Infrastructure – Churches, mosques, temples, community halls.
- Environmental Infrastructure – Parks, reserves, green corridors, new bikeways.
Beyond the creation of jobs, new infrastructure projects also make life more enjoyable…once they’re completed!
5. New Residential Supply
There is much talk at the moment about a looming oversupply of residential apartments across the major capital cities of Australia.
Is this true?
In some cities, in some suburbs and in some particular areas, yes – more than likely.
However, to say that Australia is oversupplied is a massive generalisation.
When sizing up a particular property market, there are factors that create housing demand (population growth, job creation, demographic change) and there are the factors that contribute to new supply.
To effectively determine the supply side, it is important to understand the difference between housing types and the various stages of housing supply as the notion of a ‘property market’ is too general; there are many sub-markets, such as houses, townhouses and apartments.
Whilst there is no hard and fast rule, new housing supply can broken down into the following stages:
- Development Applications – This is the number of dwellings lodged with a local authority. When lodging an application, there is no guarantee that a developer will actually start construction. For example, they will still need to pre-sell the project, procure construction funding, appoint a builder and deliver the project. In short, applications don’t automatically equate to houses!
- Building Approvals – Similar to applications, approvals are simply a measure of development applications that have been approved by a local authority. The same challenges (above) still apply.
- Construction Commencements – This is the real deal! When considering supply, construction commencements are the number to watch as this is what is literally under construction and (almost) guaranteed to be completed.
- Completions and / or Settlements – Building completions and / or settlements is a measure of the new housing supply that has been approved, construction and recently completed.
6. Lifestyle And Amenity
According to REA Group Chief Economist Nerida Conisbee, suburbs with shops, transport and schools rank as the most in-demand searches on realestate.com.au – Australia’s most frequented online property portal.
Because it’s important!
Lifestyle is arguably the most important factor when considering a property.
Suburbs that offer existing retail, such as shopping centres, supermarkets, cinemas and coffee shops, consistently perform better than suburbs that don’t.
Property markets are complex beasts that are impacted by many different factors.
In light of this complexity, understanding and respecting the fundamentals of supply and demand that underlie any economic system is ever more important in complex property markets.
On the demand-side, population growth and job creation tell us a story about the quantity of people entering a particular market, while demographics gives us a sense of the quality of who, where, what, why and how they are living their lives.
On the supply-side, we’re able to see what is coming on the horizon by watching the new residential supply metrics to better determine whether there will be an over-supply or under-supply in the years to come.
And finally, lifestyle factors – such as retail, liveability, access to transport and jobs, health and education infrastructure – and finally, affordability, play into the equation.
In spite of all the complexities, investing for the long-term in the fundamentals of a property market is the best way to ensure success in property.