Population growth and the residential property market

I have been asked to develop further my ideas on population growth and residential property.  I hope to make it clear that arguments using population growth as a cause of future house price growth are probably misleading.

The first chart (above) shows the rate of population growth (RHS) and the the growth in the ABS capital city price index (LHS).  There are two important things to take away from this chart.
1. The rate of population growth can change very rapidly, and extrapolating past trends will always miss changes to this rate.
2. There is no significant relationship between these two figures over the period.


In fact, this chart supports the ideas espoused (for example here and here) that population growth and home prices are simultaneously determined by other factors, such as the health of the economy as a whole.  We should really put to rest all arguments centred around population growth and the apparent housing shortage.  I always wonder how this population growth occurs without new development anyway?  Apart from small changes due to increased occupancy rates,  population growth and development reinforce each other.

Even if population growth did strongly explain home price growth, one must imagine that an unexpected future decline in the rate of population growth would lead to price declines.  Does that mean that to sustain prices we need to sustain this rate of population growth indefinitely?

Either way you take it, invoking population growth to explain house prices is inherently misleading - why not simply price level and population level?

The second chart (below) show the ABS capital city price index in real terms, and the NSW median household income in real terms.  After the 1980s boom, the house price index did not recover its real 1989 peak until 1998 - a period of 9 years with no real capital gain.

What the data misses is that during this 9 year stagnation, the quality of homes, in terms of size and location, was probably improving.  A hedonic index (such as the RPdata-Rismark index), had one been around at the time, may have shown and even lower real return, or in effect, a longer period of stagnation.

What is also interesting is the significant change in the ratio of prices to income since the late 1990s, even though Australian mortgage interest rates have been relatively stable since about 1996 (between 6 and 8%).

So what does it all mean?

Essentially, we are in for either a long period of stagnation in residential property prices, or, if my predictions of a W shaped financial crisis are correct, potentially a severe short term decline in prices with a very slow recovery.  Of course, the RBA has plenty of interest rate ammunition should another crisis precipitate.

Time will tell, but my advice (if you want to know) is that potential home buyers, especially first home buyers, should be in no rush to get into the market.