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How will Australia’s demographics change our property markets?

Australia’s property markets are driven by our demographics: who we are, how we live and where we want to live in the future.

Sophisticated property investors are students of demographics, so I found a recent Goldman Sachs report, A Study On Australian Housing: Uniquely Positioned Or A Bubble?, an interesting insight into the different forces driving our housing markets.The report points out that Australia’s population is currently growing by around 2.1 per cent per annum, which is faster than any other developing nation. In fact we’re growing at a rate more reflective of a developing nation than of a wealthy developed country.

While we are experiencing a baby boom, two-thirds of population growth is due to immigration. Sure this is now slowing, but the trouble is that over the past six years we haven’t built enough dwellings to meet the needs of our surging population.

The report explains that in the 20 years between 1985 and 2005, Australia built an average of 150,000 homes each year for every 240,000 increase in population. That translates to 60 per cent of a new home constructed for each new person.

But in the past six years, this trend has changed and we’re only building 30 per cent of a home for each new person. And it’s even worse in New South Wales, where only 20 per cent is constructed for each new person.

But just as importantly the report explains how our changing demographics will alter the housing landscape in the future as we experience a huge change in the demand for housing, as the children of the baby noomers will hit household formation age.

According to Goldman Sachs, over the past five years, there’s been a surge in the growth rate of the 25 to 29 age group – which has been rising by an average 3.7 per cent each year. This will result in an average 2.7 per cent annual growth rate in the 30 to 34-year age group in the five years to 2016.

This is a dramatic increase, considering these two age groups averaged growth rates of less than 0.3 per cent per annum for the 15 years up to 2006.

The combination of these two factors – our increasing population and the growing number of people in the key household formation age – is setting the scene for a chronic housing shortage.

The report explains: “We see an acute housing shortage developing in coming years. At the national level, our base-case forecasts suggest that in 2010 there is currently a demand for a housing requirement of 190,000 in 2010, which is set to rise to 196,000 in 2015. This compares to housing completions of 145,000 in 2009.”

It warns that “in the absence of a large and sustained rise in housing completions in the next five years, an acute shortage in housing is set to accrue”.

The report estimates there’s a national shortage of around 157,000 dwellings and estimates the housing shortfall will increase to 250,000 units by the end of 2012.

Of course this type of claim is nothing new and is in line with reports by other economists, including the National Housing Supply Council study.

This ongoing shortage of dwellings is one of the reasons I feel confident our property markets won’t collapse as some overseas economists are suggesting.

But don’t get me wrong, it doesn’t mean property prices will keep soaring either. This will depend upon interest rates, affordability, the state of our economy and consumer confidence.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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