Population density, demand and house prices.

As most people are aware Australia’s population has now tipped the 23 Million mark.  Coming originally from the UK, where over 60 Million individuals reside in a land area which could be fit into Australia more than 58 times over, the 4.25 Million living in my home town of Melbourne and its surrounding suburban sprawl, feels noticeably different.

Victoria has exceeded all states in the population stakes. According to the ABS, over the year to 2012, we welcomed an additional 99,548 new residents.  Of that number, 56.4 per cent were overseas migrants, 41.8 per cent from births, and only 1.7 per cent from interstate migration.

As demographer Mark McCrindle recently reported, the number of people residing in Australia has increased by 8 per cent over the past 5 years and (under current forecasts) Melbourne is set to eclipse Sydney as Australia’s largest city by the middle of this century.

However, whenever population statistics are released, it inevitably follows that we get a host of articles directly aligning population density to rising house prices. While it’s not unreasonable to assume that an increase in the resident population will swell demand for home sales, its far harder to directly align the statistic to burgeoning house prices. This is especially the case when you consider that, despite Victoria’s booming population, Melbourne currently sits about 15 per cent below the five year average in total annual sales turnover, and throughout 2011/2012, was tracking at levels not seen since the late 1990s.

Turnover is an important figure in real estate – more important than median price rises.  Strong sales turnover keeps the industry, along with its retail offshoots, ticking along.  Without a good supply of buyers and sellers agreeing on property transactions, the market becomes somewhat stagnated and the resulting consequences can be felt across the broader economy.

However, whilst a higher sales turnover in any area where both land and supply is limited can result in rising median values, it isn’t necessarily correlated with increased population density; rather it generally relates to the amount of debt taken on by mortgage borrowers, a good proportion of which will be investors.

Investigating the potential for a surge in housing values involves a lot more than following population increases.  If you were to follow the population in Melbourne, for example, you’d be including locations such as South Morang, Tarneit and Dallas. Median house prices in these areas haven’t done much – in fact over recent times they’ve been falling despite an increasing population.

The last significant price rises in many of these regions was during 2009 – when some suburbs rocketed by 20% or more.  However, it’s important to understand that population growth didn’t fuel that surge - rather it was credit growth.

The post GFC boom which took us to the ‘peak’ of October/September 2010 was stimulated initially by the first home buyer boost (Reflecting the Rudd governments attempt to ward off a GFC inspired slowdown by injecting easy credit into a number of economic sectors.)

This resulted in a price multiplier effect across the market as generous amounts of cash were wafted in front of inexperienced buyers – many of whom took the additional dollars offered for new accommodation.

Once again, it shows the futility of first home buyer grants as a savings mechanism, further establishing the fact that the more money you pump into the market, the higher house and unit prices inevitably become.

Significantly, our fringe locations have an abundance of land along with ample off the plan packages waiting to be snapped up for those willing to pay the relatively high prices. There is certainly no shortage of supply in our fringe suburbs, meaning that any increased demand from home buyers is most unlikely to result in the same ‘pent up demand’ which can trigger price surges typical of inner suburban markets.

Furthermore, these areas sit in what is commonly referred to as the ‘mortgage belt’ regions - areas which – according to a recent Fitch report – remain venerable to delinquencies.

In contrast, the more affluent inner city regions – areas such as Boroondara in Victoria’s inner east for example – where it’s impossible to secure housing below the metro median, have lower delinquency rates and a far higher proportion of residents employed as professionals and managers.

Evidently, costly house prices in these vicinities are stimulated by above average median incomes in occupations most likely to have benefitted from strong historical salary growth, facilitating greater debt serviceability as well as the ability to leverage off existing assets.

But even this doesn’t mean that increased population density capital city suburbs, which seemingly have no room left to swing a cat, is directly correlated to price rises.  It’s not. For example, over 60 per cent of the apartment stock in the larger capitals is investor owned. Obviously, it increases demand from renters – a large proportion of which are priced out – but the investors evidently reside elsewhere.

Of course, as mentioned above, supply is a significant factor, and in our current high density culture (where historical development limits have been stretched), the inner suburban regions are not immune.

Over recent years Melbourne has experienced a high density boom with CBD high density development and inner suburban towers producing a significant over supply of one type of accommodation – relatively small one and two bedroom apartments, primarily suited to the student market.  The buyers for this type of accommodation typically don’t reflect an increasing local population.

For example, when Melbourne’s Docklands were established the apartments were swiftly offloaded by sales agents – taking a generous cut directly from the developers - predominantly to off shore investors.

However, supply was never tight enough, or the developments attractive enough, to ensure ongoing demand.  Subsequently the rental guarantees expired, prices stagnated and dropped, and despite its close proximity to the city, vacancy rates in the suburb remain close to 10 per cent.

The housing shortage debate is one that gains regular media traction yet is rarely understood.  If the supply equation is a simple case of putting every newly prospective household in our country into a new home, then the short answer is yes, we have a housing shortage – we’re not building enough.

But demand for housing comes from consumers, and the real shortage is for affordable accommodation that meets the current needs of our modern home buying demographic - young couples most likely at the stage of their life where they are planning (either immediately or in the near future)  on forming a family.  First home buyers as a proportion of the buying market have been diminishing – and currently make up only 14 per cent of the market.  The rise in prices is being fuelled by up-graders and investors – not new purchasers.

Put simply, the properties we are currently building are not attracting a greater proportion of local buyers, who quite clearly prefer established properties over new development for a variety of reasons - which can be summed up somewhat under the heading inelastic short sighted development policies.  This is why residential construction is currently experiencing its ‘longest trend decline in post-war history.’

Take Sydney for example.   Significantly more expensive than any other capital city in Australia, by the year 2000, affordability levels were at a crisis point. However, from around 2003 the market remained stagnant and, despite continued population growth, it didn’t renew its’ upward trajectory till 2009.

A shortage of supply and solid demand may have prevented prices falling – however population density was not the main driver of them subsequently rising.  Significantly, Sydney’s buying market is comprised of almost 50 per cent investors - all borrowing to take advantage of well spruiked prospective gains, as an increasing number speculate on the market in an attempt to pump their savings into anything that ‘promises’ a better return than the stock market or a long term deposit account.

And let’s not forget foreign investment and the impact this can have.  London is a good example.  The scream for housing in the UK, and London particularly, due to ‘shortages’ and rapidly rising prices, is because over 50 per cent of prime London land and property is owned by offshore buyers and developers who have no interest in building ‘affordable’ accommodation to fulfil ‘real’ home buyer demand from middle income workers.  The gains are coming from those who have hundreds of thousands to invest in what’s perceived to be a relatively safe haven, and to date it’s been channelled into the premium housing sector.

The recently imposed UK mansion tax may impact on these statistics, however there is no doubt England’s “help to buy” scheme will do a fair job of propping up the lower end of the market as, once again, the ‘proof’ of rising prices comes policies facilitating increased debt access and take up.

We all know the reality behind our golden years of growth.  The 250%+ increase in house prices over the last decade has been fuelled by increasing debt, financial deregulation, duel income households, first home owner’s grants, and a rapid increase in the purchase of investment properties.

People were able to borrow more to fulfil their desire to not only own their own castle and add an extension (further inflating median values,) but also to leverage the accrued equity and “invest” over the duration (usually in more real estate), with banks emerging as the real winners.

The rapid increase in house prices over the period has had little to do with population density per se, but everything to do with credit growth – and you’ll find similar stories repeated across the globe.

Price rises are more often than not fuelled by speculation that the next generation will pay double for the second hand house in – how does it go – 8 or so years time? But whilst population growth certainly is a factor, and will push demand, actual house price appreciation more directly stems from from a higher proportion of mortgage holders shopping within an area of limited supply, rather than  a higher population density. It’s an important distinction.

We may be consistently told that house prices are as high as they are because we’re not building enough supply, but the reality is, house prices have been pushed up in line with the banking system’s ability to lend and the consumer’s appetite to borrow, and considering banks favour lending against existing collateral over and above productive investment, it should come as no surprise that the vast majority of bank lending (about 60%) has been towards the purchase of ‘bricks and mortar’ – with the only constraint on the amount of money ‘created’ being mortgagees ability to service the debt.  For those who got in at the beginning of the lending boom, the party continues.

However this is in many ways inherently unstable and the only way to stop the whole system collapsing is to prop up the debt levels we’ve already created, and find new ways to pump cheap credit into the system.  For those renting and facing the challenge of their first purchase, this means continuing to be saddled with high capital prices which they are expected to service for ever longer periods – now sometimes extending out though mortgages of 30 years or more – and a continuous low interest rate environment, or shared equity schemes and other funding innovations all pitched to maintain the perception that housing has never been more ‘affordable.’

Catherine Cashmore