The True Meaning Of ‘Housing Demand’

‘Supply-and-demand’: When it comes to property markets, there is an enormous societal lack of understanding of these two small words.

The regular rhetoric reported by economists and property experts follows a meerkats theme: Simples – just subtract ‘x’ (supply) from ‘y’ (population growth).

Property markets are far from simples!

Aside from finding a cure for cancer, I’d argue that there are few things on the planet that are more complicated than property markets.

The supply and demand equation of a property market is nothing like a barrel of oil, a wagon of coal, or a crate of bananas.

People aren’t homogeneous. Properties aren’t homogeneous either. In the grand scheme of things, year-to-year population growth plays only a small role in real estate price fluctuations. Population growth didn’t even make the cut for my list of Top 10 Property Market Influences.

The pieces behind the performance of a property market for an individual city is akin to a big jigsaw puzzle.

The purpose of this report is to articulate something which possibly no one has ever accurately done before – to properly explain ‘housing demand’.

Fun Facts

Let’s start with this small sample of real estate facts to dispel some myths and help sharpen your focus:

• BYRON NSW: 9.3 percent average annual increase in the median house price over the last 20-years is officially the highest rate of capital growth in Australia. Moreover, on the national scale of highest median house price Byron is ranked number One. Conversely, Byron’s average annual population growth rate over the years has consistently been below the national average and the total resident population of 35,000 makes it Australia’s 73^rd largest city.

Related article: Australia’s 40 most expensive locations

• ALICE SPRINGS NT: Over the 17-years ending 2018, Alice Spring’s population declined by 315 while Gold Coast’s increased by 227,000. The median house price of both locations increased by 190 percent over this period. It would therefore seem that beaches don’t have a dominant influence either.

• The very best-performed property markets across Australia over the last 3-years included Glenorchy TAS (36.6 percent increase in median house price), Orange NSW (30 percent), Colac VIC (25.5 percent), Burnie TAS (28.1 percent) and Launceston TAS (24.9 percent). Their respective population growth rates were far from spectacular. Conversely, Melbourne had the highest capital city population growth rate yet its 7.7 percent increase in median house price over the 3-years was miles below Hobart’s 31 percent growth. Ipswich (3.2 percent average annual population growth rate) and Gold Coast (2.5 percent) were among the highest in Australia yet their respective property markets were underperformers.

• MELBOURNE VIC: During 2011 and 2012, Melbourne’s population increased by 160,000 however, its median house price declined by 5 percent. Similarly, on the back of producing its two biggest years of population growth ever, Melbourne’s median house price declined by 13 percent over the 2-years ending June 2019.

• HOBART TAS: Hobart has never been a population pacesetter. The average annual population growth over the 10-years ending 2018 of 0.9 percent is the second smallest of all capital cities (just in front of Adelaide’s 0.8 percent). But the 51 percent cumulative increase in Hobart’s median house price over the last 5-years makes it the best-performed property market in all of Australia, well ahead of second place (Melbourne 32 percent), and more than double the other 6 capital cities. And over the 20-years ending December 2019, Hobart is ranked first out of all the capital cities with a 7.9 percent average annual increase in median house.

• ARARAT VIC: Ararat’s population increased by just 463 people over the decade ending 2019 but its median house price increased by an average of 3.5 percent per annum. In contrast, Australia’s largest municipality (Brisbane City Council) produced population growth of 173,913 and its median house price increased by an inferior 3.3 per annum.

• LAUNCESTON TAS: Australia’s 34^th largest city (population 65,000) produced an average annual increase in median house price of 7.4 percent over the last 20-years, superior to the 7.1 percent of Australia’s largest city (Sydney, population 5.3 million). Population over those two decades increased by 5,000 and 1.3 million, respectively.

Population Components

We’ve already given you a bunch of facts which prove that population growth does not correlate with price growth. Now let’s strip apart the components of population growth.

Using Sydney as an example, population headlines focused on the 93,237 total population increase during 2017/18 financial year. The commentary referred to people being crammed in like sardines, the impossibility of ever being able to supply enough dwellings, and the property boom that would never end. To the contrary, Sydney’s median house price declined by 5 percent during that financial year and a further 13 percent in the following 12-months.

Yes, people do need to live somewhere. But it seems appropriate to remind everyone that there’s no rule which says everyone must, can or even wants to buy a property.

Organic population growth (the net result of births and deaths) generally doesn’t create any extra demand for housing at all. Babies don’t buy property and the deceased actually free-up housing supply.

When someone migrants to our shores from a different country, their biggest priority when they land is not to buy a property. Their initial focus is employment stability, enrolling children into school, establishing a network and getting a feel for exactly where in this country they want to put down roots. The bulk of overseas migrants rent for several years, especially if they’ve migrated to expensive cities like Sydney and Melbourne.

Out of all of the population growth components, internal migration (when an existing Australian resident moves town) has the biggest impact on housing demand, although that doesn’t mean that all will buy a property. In the above example, Sydney actually lost 27,434 people to internal migration.

Buyers Dictate Price

Instead of the population growth that everyone believes to be the driving force, housing demand is all about population behaviour.

The fact that human behaviour is so unpredictable is the reason that the task of forecasting property markets is so damn difficult. It’s not a mathematical formulae or exact science!

But, instead of being obsessed with the circa 1 to 2 percent annual increase in population, one must focus on the common influences on 100 percent of the existing population of a city.

Property prices are dictated by buyers. An increase or decrease in the total volume of property transactions (which often does not correlate with population growth trends) will be reflected in property price movements. This chart provides compelling proof.

Every year, in every town and city, lots of properties are purchased whether population increases or decreases.

If there’s just one thing that one implements as a result of reading this report it should be to develop a deeper understanding of the many things which influence the actions leading to someone buying a property.

In doing this, one must always remember that buyers are humans – we are all different, we are not robots. Personalities and priorities vary widely from one human to the next.

Similarly, an individual property is nothing like a kilogram of coal. There are great variations in property size, property type, aesthetics, the condition of a property and the neighbourhood surrounding a property.

Within one city, the cost of a property might range between $250,000 to $2.5 million. The variations in annual incomes from one household to the next is equally wide. Banks assess loan applications accordingly. Those who frequently reference real estate’s must useless ratio – a city’s ‘median household income to median house price’ ratio – would be wise to remember this.

As illustrated above, there is a direct correlation between the volume of properties that change hands within a given year and the change in median house prices in that year. The better conditions are for buying property in a broad sense, the more active buyers will be.

Instead of obsessing over population growth and neighbourhood features and benefits, Propertyology’s analysis of property markets focuses on local (and macro) factors which affect buyer’s financial capacity to be able to transact in  property along with a wide range of macro and micro factors that either motivate or demotivate the various buyer demographics.

• Buyer demographics
  • First home buyers
  • Upgraders
  • Downsizers
  • Retirees
  • Investors
  • Overseas migrants
  • Internal migrants

• Buyer capacity
  • Dwelling values
  • Buyer salaries
  • Credit policy
  • Interest rates
  • Government grants

• Buyer sentiment
  • National dialogue (excitement or fear?)
  • State dialogue (excitement or fear?)
  • Local dialogue (excitement or fear?)
  • Economic conditions (federal, state, local)
  • Elections (federal, state, local)

In a sense, housing demand is a measurement of the mood of the masses in respect to buying property.

If there’s one thing which has the biggest influence over all of this, it’s local economic conditions. A stable local economy provides an environment which gives each segment of the buyer demographics the confidence and capacity which is required to transact in real estate. Local conditions always have a much bigger influence than rhetoric of the day at a national level.

Related article: An investor’s guide to property economics 101

I’ll give you all just one guess what Propertyology dedicates most of our research resources on.

The 14-House Community

Here’s a simple activity to put in to practice the things which I’ve just explained. If one can understand this concept one will have a better than average understanding of housing demand.

Imagine that you are one person within a population that consists of just fourteen (14) households. A city is an extrapolation of the 14-House Community (just add zeros).

Remembering that people (and properties) are not homogenous, the immediate accommodation priorities will be different from one household to the next.

The illustration below shows seven (7) very common reasons why an existing household might want to buy property. If the conditions within that community are conducive, that buying activity will generate pressure on property prices.

Note, this situation makes no allowance at all for population growth.

If consumer and business confidence within the community is good (influenced most by current and anticipated future economic conditions) then those who have a need to buy real estate will.

If those same economic conditions continue to strengthen, the community will progressively attract others to relocate to their community. Whether from another town within Australia or from overseas, if those migrants plan on staying long-term and housing is affordable, they may become a buyer – otherwise their migration will add to local rental demand.

Other important layers to add to the above scenario include the availability (and cost) of credit plus any incentives (or disincentives) to one or more buyer demographics.

Case Study

Brisbane June 2018: Over the preceding 5-years, every Tom, Dick and Sally was predicting that Brisbane’s property market would boom. In addition to the generic ‘…it will boom because Sydney and Melbourne have…’ (for the record, property markets don’t respond like a common cold that everyone catches), the three most common reasons given for the predicted boom were:

• ‘…Brisbane is more affordable than Sydney and Melbourne…’
  • Sydney median house price $972,000, Melbourne $740,000 and Brisbane $536,000.
  • The reality is that Brisbane housing, since it was established 200-years ago, has always been more affordable than Sydney and Melbourne. In isolation, that’s not a reason for price growth.
  • Australia consists of 185 individual towns and cities that have an individual population of 10,000 or more. Brisbane is ranked 23^rd highest for median house price. There is no ‘pecking order’ for property booms.

• ‘…Brisbane’s population growth is strong…’
  • Over the last 10-years, the average annual population growth rate in Greater-Brisbane (1.8%) was the second highest capital city (behind Melbourne’s 2.1 percent) while and Brisbane City Council (1.5 percent) was on par with Greater-Sydney’s population growth rate over the decade. Th rest-of-QLD population increased by an average of 1.2 percent over the last 10-years – higher than Adelaide (0.8 percent) and Hobart (0.9 percent) and not far behind Sydney 1.5 percent, but property prices have been largely flat.
  • Hopefully the evidence in this report puts the population growth myth to bed!

• ‘…Queensland (aka ‘Brisbane’) has the highest interstate migration…’
  • ‘Queensland’ does not mean ‘Brisbane’. 53 percent of Queensland’s population live somewhere other than in Greater-Brisbane. The sunshine state is Australia’s most decentralised mainland state.
  • While Brisbane City Council (BCC) is home to 24 percent of the state’s population, only 10.3 percent of the 27,522 people who relocated interstate to Queensland in 2017/18 chose BCC. This equates to only 2,824 people, so it is incorrect for anyone to say that everyone is moving to Brisbane.
  • Of the 22,942 total increase in BCC’s population in 2017/18, the biggest contributor was overseas migration (11,917 or 52 percent) but, as explained previously, a very large majority of overseas migrants rent for several years (as opposed to buy property).
  • Given that BCC has an average of 2.54 people per household, internal migration created extra demand for 1,111 dwellings. Even if 100 percent of this cohort were to buy a property (which is extremely unrealistic), this still only represents 4.7 percent of the total volume of properties transacted in 2017/18

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