A little while ago the ABS has released its first edition in a brand new series – its Population Grid based upon the Census Data from 2011.
The Census data helps to produce graphics of population density per 1km squared as at August 2011.
Every so often a smart Alec produces a graphic a it like the one below together with a comment with the subtext “no land scarcity in Australia! Property prices will crash!”
And indeed to look at the Population Grid, you would be forced to conclude that there is indeed no scarcity of land in Australia!
Australia the sixth largest country in the world comprising well over 5 percent of the total landmass of all the countries on earth, and is the largest country on the globe with no land border to neighbours.
And most of Australia is completely empty!
Clearly there is no actual shortage of land, particularly out in regional Australia.
Yet since 2008 house prices in Sydney have continued to rise at around 7-8 percent per annum on average to be well over 50 percent higher than they were at that time, so the crash theories haven’t worked out too well.
There are essentially three reasons why land can be a scarce commodity in Australia.
The first reason is that a huge amount of land in Australia is arid and close to uninhabitable, which any satellite view of the country clearly shows.
Shifting the Population Grid to the “mesh view” below reveals the second reason, that most of the land in Australia is completely restricted from the building of dwellings.
The mesh view shows a number of large areas which may not be built on – you can see in the centre of Australia for example a good deal of land within the Simpson Desert which is restricted, and to the west in the Great Victorian Desert.
There are also National Parks surrounding cities such as Sydney and other land which is zoned not for residential use.
We need to zoom the chart in to see the third reason, and that is that in Australia’s largest cities where most of the employment opportunities, infrastructure and facilities are located, folk ideally don’t want to live more than about 25 minutes from the centre of the cities.
The largest cities are relatively centric in nature.
Much of Australia’s land “scarcity” is artificial, which has been the case since the main capital cities were first founded using the US-style grid system.
The land was quickly zoned into roughly equivalently sized plots which encouraged speculative activity (the plots were never completely evenly sized – due to inexperienced or fraudulent use of the chain measures, and sometimes plots had to skirt around existing landmarks or buildings).
The issue was exacerbated by all of the main cities being located beside water, preventing outward sprawl.
Cities with land scarcity particularly include Darwin and Canberra, but it’s actually the case in almost any large city to a greater or lesser extent due to zoning restrictions and the management of land release.
Property prices can be driven higher by:
- an increase in the size of Australia’s population; and/or
- the increasing wealth of that population
Data from the Q3 2014 National Accounts showed that household wealth in Australia roared to its highest ever.
Contrary to popular belief this was not driven purely by land and dwelling prices, with a substantial amount of that wealth being grown in currency, deposits and equities, particularly within superannuation balances.
Our recent analysis of demographic statistics here showed that population growth in Australia has slowed to around 360,000 or 1.6 percent per annum which is nevertheless a very large number of new persons each year.
Most of the population growth takes place in only four locations: Greater Sydney, Greater Melbourne, Greater Brisbane/south-east Queensland and Greater Perth.
Population growth is generally slower in the regions of Australia and now likely to slow further due to an ongoing dearth of employment growth or opportunities, as our recent analysis of the detailed labour force data revealed.
This is by no means a unique issue to Australia for there is a global trend toward urbanisation and mega-cities.
The urban share of the globe’s population has increased from 30 percent in 1950 to 54 percent in 2014. By 2050 some 66 percent of the world’s population will live in urban areas, and in Australia the percentage share will remain far higher still.
The Population Grid showed that Sydney is Australia’s densest city with 21 square kilometres with more than 8000 people per square kilometre.
By contrast Melbourne had just one square kilometre.
Unlike Melbourne the sprawl of Sydney is tightly contained on all sides by the Pacific Ocean and National Parks, which is one of several reasons we believe the harbour city will continue to be home to the most elevated dwelling prices in Australia over the long term.
In 2011 Sydney also had much more widely spread high density living with some 93 square kilometres of land with 5000-8000 people per square kilometre (essentially much of the inner 12km ring) compared to only 33 such square kilometres in Melbourne.
Brisbane was the only other city to have any living at this level of density with 3 square kilometres at 5000-8000 people per square kilometre.
Elsewhere living in Australia is not dense by international city standards.
Sydney’s most dense suburbs generally comprise those that are centrally located such as Woolloomooloo, Potts Point and Pyrmont. These “densest” suburbs are considerably denser than those in Australia’s other cities!
Nevertheless Australia’s cities are comparative lightweights when it comes to high density living.
For example, London has some 327 square kilometres of land with more than 8000 people per square kilometre!
The combination of London’s restrictive green belt, within which more than 20 million people now reside, and woeful levels of construction it is small wonder than mix-adjusted house prices in London have zoomed more than 75 percent higher since 2007.
Undperformers and Outperformers
You would have thought that given the geography, economic make-up and planning constraints of Britain it would have been pretty obvious that London would see the greatest house price gains over the long term, which is precisely what has happened.
In truth though the property seminars prior to 2007 often spoke of using 100 percent(+) mortgages to invest in regional Britain for higher yields on the basis that “property always goes up!” – which it largely did until household debt levels peaked in 2007.
This is a confused approach.
While they may sound similar, yield (a spot percentage calculation made at the point of purchase) and income (total rental received over the live of the asset ownership) are very far from being the same thing.
The asset which is in the highest long term demand is the outperformer.
Look for Scarcity of Land
A good many British investors are now discovering just what a poor investment residential housing can be if you invest for yield first and growth second, with ex-London prices failing to record any growth at all in 8 years leaving many investors “under water” or in negative equity.
There are some lessons here for investors in Australia too.
Be wary about investing in outer suburban or fringe city areas where land is not a scarce commodity.
A $200,000 outer suburban house may comprise only $50,000 of land value, so even in the unlikely event that outer suburb land values boom by 50 percent, the total value of the investment only increases by $25,000.
Why is this the case?
Because outer suburban housing is readily substitutable with more fringe housing.
If you invest in property where land is not scarce or in high demand, then this can be akin to investing in the future price of bricks – and project homes actually seem to be getting cheaper over time rather than more expensive.
The macro picture can only tell you so much, however. It’s also important to understand markets at a micro level.
For example some years ago there was a widespread belief that Melbourne’s property market must correct due to overbuilding, yet median prices have continued to rise.
Well I don’t go to Melbourne all that often, and am surely no expert in that state, but if Melbourne’s market mirrors that of Sydney in any way the likely answer is that the residential construction boom has largely comprised:
- Fringe detached housing for which there is a relatively low demand; and
- High rise unit blocks, with low owner-occupier appeal.
In the types of property and popular land-locked locations where most people want to live – particularly between 5 and 25 minutes from the city – available land is extremely scarce and, like most large, growing and thriving cities in the world, the prime location real estate becomes more expensive over time.
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