More people, higher prices

Today I unpack one of the key drivers of house prices.

There are a lot of reasons why house prices are high in Australia, and just keep on going higher.

“Because there’s a bubble” is the least convincing and laziest of all reasons. And I think that’s its appeal. For people who can’t be bothered unpacking the complex reasons that drive house prices, the “Housing Bubble” is very convenient.

Anyway, I’m not going to unpack it all here, but one of the key factors driving higher house prices is solid population growth.
More people means more demand for houses, means higher prices.

There are a few general trends to keep in mind when we’re talking about people.

The first is that Australia’s birth rate was looking a little dire in the late 90s. But it’s picked up from the early part of the century – perhaps thanks to Howards baby bonus?

At any rate, we’re having a decent amount of babies now, but none of those babies are at house-buying age yet.

But in 5 to 10 years? Look out.

So in the immediate term, house-buying population growth is coming from somewhere else. And that’s immigration.

Long-term immigration into Australia picked up around 2003, and has since held at some strong levels.

In the year to April 2017, there were 737,530 permanent and long-term arrivals into Australia – up 8% from March 2016 but down from the record 792,500 arrivals set in the year to January 2013 – partly offset by 450,450 permanent and long-term departures from Australia.

We can strip out the net arrivals line from this chart and this is what it looks like:

The net affect is that there were 287,080 net permanent and long-term arrivals into Australia in the year to April 2016, down from the record 416,810 net arrivals in the year to July 2009, but way above the 40-year average of 164,173.

So this strong immigration picture is part of the story.

But the other thing to remember is the immigrants tend to overwhelmingly favor Sydney and Melbourne.

And so it might be one thing if the immigration intake was spread evenly about the country, but it’s not. It’s focused on our signature cities.

And that means the housing demand that results from strong immigration is focused on Sydney and Melbourne too.

And guess which cities have seen the strongest surges in house prices.

Coincidence, much?

Now normally, this international immigration affect is partially offset by an intrastate immigration affect. Where longer-term residents in Sydney and Melbourne decide to make a start in another city.

And normally, there’s more people leaving Sydney and Melbourne than are coming in from our other cities, and so you have a net-outflow.

This helps take some of the heat out of demand.

But recently, these intrastate flows have weakened. They were very strong when the resource states of WA, Queensland and the NT were pumping, but now that they’re not, these flows are reversing.

People struggling to find a job in Perth are heading back for Sydney.

And that means that the little pressure outlet that intrastate immigration used to give Sydney and Melbourne has disappeared.

And that means even more demand and even higher prices.

This is one of the key stories.

So take note. If you don’t know this, then you know nothing about the drivers of house prices.

Spiro Kladis
Managing Director, Cashflow Capital

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