Property market performance is perfectly predictable

The two most significant demand dynamics of our housing markets are population growth and purchasing power, but they can work in very different ways, often creating confusion in the process.

Most experts link population growth to housing market performance because every new household needs somewhere to live.

While this is certainly correct, this demand can be for rentals rather than purchases - it depends on the type of households creating the demand.

Since the reopening of international borders, most new households have been overseas arrivals.

They made up eighty per cent of our total population growth in 2023 (according to the ABS) but most of these new households will need to rent for several years before they can purchase their own homes.

Population growth is causing rent rises rather than price growth

This explosion in overseas arrival numbers explains why asking rents rose by over fifteen per cent last year in popular migrant destinations such as Sydney, Melbourne, Brisbane and Perth.

Eventually, these households will want to buy their own homes, but this will then be dependent on their purchasing power.

More purchasing power causes house price growth

Changes in the cost and availability of housing finance directly influence buyer demand and can change prices.

While housing finance is tight or costly, frustrated aspiring home buyers and upgraders must bide their time, creating a growing backlog of pent-up buyer demand.

Then when the conditions change, and there’s more and cheaper finance on offer, a virtual tidal wave of buyers enters the market and prices can surge.

For example, during the pandemic years, interest rates fell dramatically and the banks were awash with billions of freshly minted helicopter money.

Demand from aspiring first-home buyers and upgraders quickly escalated even though our borders were shut and population growth was minimal.

Less purchasing power leads to house price falls

House prices do occasionally take a tumble and again, this has everything to do with purchasing power.

As you can see from this graph of capital city house price changes since 2003, house prices dropped whenever the cost of housing finance rose, or its availability fell.

The effect of the Global Financial Crisis in 2008 is obvious, as were rising interest rates in 2011 and 2012. APRA’s cut to investor housing finance during 2018 and 2019 pulled prices down again as did the latest round of rate hikes.

Property markets can boom when purchasing power increases

The misconception that increases in population drive housing market performance has led many experts and analysts to declare that the recent performance of the housing market was unpredictable, when in fact it has been performing as it always has, in response to the number of buyers and their buying power.

This close correlation shows us that when those highly anticipated interest rates falls occur, we can expect another flurry of first home buyers into the market.

In addition, many who purchased their first home during the COVID-19 years will take the opportunity to upgrade to a bigger home or more suitable location, and another boom will occur.

About John Lindeman John Lindeman has well over a decade of experience researching the nature and dynamics of various types of assets at major data analysts and is a leading property market researcher, author and commentator. For more information visit Lindeman Reports.