Expert insight: How does population growth influence capital growth?

“Let me give you a classic example: Alice Springs. People would have heard of it but not many people would have been there, it’s pretty much in the middle of Australia. It’s median house price over the last 20 years has increased by 6.1 per cent. That is more than the Gold Coast.”

“But there are less people living in Alice Springs today than 17 years ago… Still, the median house price has gone up by more than three times,” according to the buyer’s agent.

“Sydney, Australia’s biggest city, on the other hand, has had two consecutive years of all-time record population growth, but it’s in the middle of its biggest property downturn in 30 years.”

Another example would be Bellingen, a small town on the North Coast of NSW, which, over the past decade, has only seen its population grow by 200 people. Meanwhile, Sydney has welcomed around 750,000 more residents in the same period.

“Sydney’s probably given birth to two Canberras, but Bellingen’s median house price increase over the last 20 years is still higher than Sydney’s.”

Finding a good location

Population growth rate is often released with almost two years’ worth of lag, Mr Pressley said, which is why he strongly advises against making it a primary consideration when purchasing an investment property.

In fact, as a buyer’s agent, he personally excludes population growth on his checklist of growth fundamentals to watch.

According to him, a lot of investors missed out on investment opportunities in Hobart because of their belief that population growth is vital to achieving capital growth.

“We bought a heap of properties in Hobart then and it has nothing to do with population because the thing with population growth data is… due to the lag, by the time it comes to the public, a lot has already happened. It’s a figure of what happened way back.”

“Another thing is everyone assumes that if a population increases, all those new people would go and buy a home, but they don’t. Sure, they need somewhere to live and some will buy a home, but some won’t,” he highlighted.

In Sydney, for example, 93,000 new residents came in last year. Of those, 77,000 are from overseas.

When considering people who relocate, it would be unwise to think that they would be buying properties straight away.

Mr Pressley explained: “If you’re relocating from city to city within a country, there’s a lot of things you’ve got to consider already, but going to a completely new country requires more preparations.”

“While they do need to get a roof over their heads, they probably haven’t got a million bucks to buy a basic house in Sydney because it’s hard to get a loan. So, they’d be focused on getting a job, establishing some connections, then working out which part of town they want to live in.”

“Over time, some might buy a property, some won’t. Last year, 27,000 people left Sydney.”

Instead of focusing on population growth, investors are encouraged to study buyer’s behaviour instead.

At the end of the day, consumer sentiment moves the market and ultimately drives the growth of property prices within a certain location.

According to Mr Pressley, a huge portion of buyers in a market are usually the people already living in the area, which is why the influx of new residents is considered irrelevant to the growth of a real estate investment.

“Even if a population grew by zero, there’ll be a resident of that community who says, ‘I want to go from being a renter to a home owner,’ so they transact in property. There’ll be someone who’s at the retirement stage of their life and would want to downsize, so they transact in property.”

“There’ll be someone else whose family’s growing and they need a bigger property, so they’ll transact in property. There’ll be someone who wants to get their hands dirty and renovate, so they’ll transact in property. And, of course, there’ll be somebody who wants to invest.”

“Even without population growth, buyer’s activity can still and will happen,” he concluded.

Tune in to Simon Pressley’s episode on The Smart Property Investment Show to know more about the winning strategies in property investment.

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