What makes housing markets boom

Some experts tell us that property price booms are driven by low unemployment, high population increases and economic growth.  

They assure us that these conditions create buyer confidence which leads to increased demand for housing and price growth. 

History, however shows us that the housing market has sometimes performed at its best when unemployment was high, population growth low, and the economy was in recession.

For example, the graph below shows that Hobart had the best performing housing market in 2004, with housing price growth of over 50%.

Yet Tasmania’s unemployment rate was the highest of all States except Western Australia at the start of 2004, its annual population growth rate was the lowest of all States at just 0.7% and its economic performance lagged behind all the other States.

There was general consensus at the time that the Tasmanian economy was in bad shape, but despite all these negative performance indicators, Hobart’s property prices took off and produced the highest growth rate that any of our capital city’s housing markets have ever produced in just one year.

Prediction theories sometimes contradict each other 

It is seemingly unpredictable and unexplainable outcomes such as this that send experts scurrying to find other causes of housing price growth, and so some researchers tell us that there is a property market cycle of endlessly recurring booms and busts, usually spanning an eight to ten-year time interval.

Other researchers insist that areas which have stood the test of time will provide the best results and yet other experts assure us that an extended period of no growth means that prices are overdue for a rise.

You have probably noticed that these theories contradict each other, but the reason that they all fail is because they rely on past performance in one way or another.

When it comes to the housing market, past performance is not a good indicator of future performance, because the conditions which caused price and rent changes in the past are very likely to be different in future. 

This does not mean that we can’t predict the future with some accuracy.

In 2016 I publicly forecast that Hobart’s housing market would be the next to boom, despite many years of little to no growth.

The article published in Property Observer in May 2016 even stated that “Few analysts would take this suggestion seriously”.

What happened next is now a matter of history, as Hobart’s housing market quickly rose to become the best performer for both price growth and total returns.

Even of more significance to investors is that it was the only capital city housing market to achieve double digit growth during 2017

Supply and demand are the fundamental dynamics

The accuracy of such predictions comes from analysing the fundamental state of a housing market in terms of the supply of housing compared to the demand.  

In other words, no matter what the prevailing conditions, if there’s a shortage of housing stock then either rents or prices (or both) will rise, and if there’s a surplus they will fall.

A huge rise in population will only lead to a rise in prices or rents if there’s not enough stock in the form of properties for rent or for sale to satisfy the demand.

In the case of Hobart, it was not a rise in demand that led to housing booms in 2004 and again in 2016, but massive housing shortages.

There were insufficient numbers of new housing built during previous years but the demand for accommodation from both renters and purchasers had been steadily rising each year, and in 2004 and again in 2016 the tipping point was reached as demand exceeded the supply.

In both cases the rental shortage drove up rents, mainland investors bought properties because of the high rent returns, more investors bought properties and as they competed with each other, prices rose as well. 

A housing boom was the result.

Relying on the past performance of a housing market to predict the future is almost totally futile.

Employing macro-economic indicators such as unemployment rates, population changes or economic conditions may help us to understand why housing prices may change, but they won’t tell us where and when these are most likely to occur.

The key to successfully predicting the future performance of housing markets is to understand the balance of supply and demand in any area and to track the changing trends.

These will reveal not only the location of any potential boom, but also its timing and probable duration allowing us to buy before the growth starts and then sell when it is likely to stop.

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.