Does population growth drive house prices?

By Leith van Onselen

From LF Economics comes a blog post questioning whether population growth drives house price growth:

With the latest demographic figures recently released, population growth in Australia continues at a rapid pace. Unlike many other developed nations i.e. Eurozone which have experienced little to no population growth over the last couple of decades, Australia is a significant outlier.

A major concern is that the government’s immigration program – where the vast majority of population growth is coming from – is, in part, a factor in Australia’s extraordinarily high dwelling prices (houses more so than units). Although it would seem straightforward to link population growth to dwelling prices, the situation is more nuanced than it seems.

What has led to confusion over this link is the differentiation between fundamental and speculative dwelling price growth. The former is based on fundamental metrics such as rents, incomes, inflation, etc. while the latter is based on debt-financed speculation.

If population growth is exceeding the number of dwellings needed to house said population, it should be expected that rents will rise. This would most obviously be indicated by rising market rents for investment properties, but also imputed rents for owner-occupier dwellings.

As is demonstrated below, construction, adjusted for demolitions and secondary dwellings i.e. holiday homes and second owner-occupier homes, has often exceeded the flow of new households, decomposed from population flows. When surpluses occur, rent growth is low. In contrast, when deficits arise, rent growth is high. From a fundamental perspective, population growth influences dwelling prices to the extent that is causes rents to rise.

As an aside, it is fascinating to see that most dwelling price growth occurred during periods of surpluses, while price growth flattened between 2007 – 2013 when deficits occurred. This is in complete contrast to the claim by government, industry and mainstream economists that strong price growth is due to the alleged dwelling shortage. This should come as no surprise to those who understand the dynamics of prices and construction.

Dwelling prices, on the other hand, do not demonstrate the same trend with population flows. International evidence also indicates a lack of correlation. Ireland, for instance, had strong population growth during its boom. Yet the one country with the greatest boom of all, Lithuania, where real housing prices escalated by 375% between 2001 and 2007, has had negative population growth since independence in 1990.

These outcomes suggest that dwelling prices tend to be influenced by factors other than what is suggested by fundamental metrics like population growth. The obvious culprit would be debt-financed speculation as the GFC demonstrated.

Could it be that higher population growth results in more speculation than would otherwise be the case? If this were true, the highest dwelling price growth should’ve occurred during 2008/09 and 2011/12 as population growth peaked but instead prices actually declined.

It will take a carefully calibrated empirical study to determine the effects of population growth on dwelling prices, including being able to differentiate between fundamental and speculative sources of price growth.

That said, the program of population quantitative easing (PopQE) the government is running is causing real problems. Is Australia’s immigration policy now aimed towards holding up the housing market in Sydney and Melbourne? There seems little other explanation as to why the government would allow such an influx of new residents knowing that the quality of life in these two cities are diminishing by the day.

An aging population with more disability is facing increased competition, which is especially acute among the fifth of aged pensioners who rent. The social housing sector is under immense strain after two decades of disinvestment by the federal and state governments. Underutilisation is growing, with many dwellings left uninhabited. This all serves to increase private market rents.

It is high time that government publicly reviewed its immigration policy, taking these factors into account.

My own view is that the debt explosion was the primary driver of house prices over the first half of the bubble. But the population ponzi has been the primary driver over this decade.

One only has to look at the explosive price growth in Sydney and Melbourne, where values have diverged so strongly from the other capitals:

Which mirrors the explosion in the migrant intake (population growth):

There’s also the associated issue that more people means more debt. So, it’s all part of the same Ponzi dynamic.

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Comments

  1. Good article. One only has to look at the Perth rental market right now and the almost negative pop growth.

    A lot of the latest wave of migrants are also finding they now can’t afford the housing in Sydney and Melbourne which would likely partly explain the record numbers and now negative/slowing house price growth.

    • >A lot of the latest wave of migrants are also finding they now can’t afford the housing in Sydney and Melbourne

      Gosh durnit! Not the migrants too… won’t someone think if the migrats? We need the federal government to institute a scheme, call it: “First Migrant Rental Home Boost” STAT!

      • We’re also the world’s “most successful multicultural country” but now need M4 wielding cops patrolling the streets because of a threat to security.

        Straya!

    • Perths population growth of 1.3% is closer to national average than zero, hardly “near negative”. I think you are mixing up with wage growth, that would be negative. Rents are supposed to be linked to wages anyway.

      The banking boom in Sydney is providing as much profits as all the mining did in WA during its boom. That’s the reason for astronomical prices and rents in that town. The difference is, they are profits extorted from the aussie population, while WA’s extracted it from China – the former hurts, the latter made us rich.

  2. Given what Nobel Laureate Deaton says about accelerating youth mortality here,http://www.zerohedge.com/news/2017-12-14/nobel-laureate-discovers-cause-opioid-crisis-complete-economic-destruction-white-wor,
    I wonder how long until we are loosing more of our youth-in-crisis annually (housing, underemployment, privelaged parents blaming them) than the number of our servicemen we lost annually in WW2. And next time, Australia, please please please think before you elect ex-Property Council and Ex-Goldman Sachs stooges. There is a lesson to be learned here.

    • What caused those places to fall over though, given Ireland and Spain in particular had a price crash before inward migration crashed?

  3. Apparently not, given record NOM to Sydney and Melbourne was unable to prevent a significant RE slowdown in both cities,including falling prices in Sydney.

  4. it’s absolutely debt that is the driver.
    It doesn’t matter how many people come to Oz if the banks weren’t lending as frenetically the immigrants would be living in tents.

  5. The LF Economics analysis is fundamentally flawed because it is averaging Australia wide data, It is not looking at where the population growth (change) is occurring. Australia has many population centers. And when we study population change for each of these centres it becomes obvious what impact population movements has on property prices.

  6. It is all about housing supply. That example of Lithuania is interesting. I have always used Liverpool as the example of a shrinking population with a chronic housing affordability problem, I did not know about the Lithuanian example before.

    The problem in both Lithuania and Liverpool is that the market is unable to deliver the housing that people actually want. Only when the market is free to supply the larger homes on larger sections that a significant proportion of the population wants, and without price-gouging by land owners favoured by urban planners, will house price median multiples fall to the affordable benchmark of around 3.

    In both Lithuania and Liverpool the predominant housing stock is brutal low quality attached housing and apartments, and the Communist era in Eastern Europe and the Town and Country Planning system in the UK result in a lot of similarities in housing outcomes. Only once this kind of housing is being systematically augmented and / or replaced by what people actually want, at un-rigged land prices, is stable and affordable housing prices possible.

    The numerous cities in the USA that demonstrate that housing supply (in fact, the land supply for housing) is crucial, not only demonstrate that population growth is close to irrelevant, they also demonstrate that credit is close to irrelevant too. I am surprised to see Leith Van O still giving this factor any credence.

    The counter examples in the other direction can be found in the numerous developing nations where there is no credit at all, and yet people still have to save up more than 10 times their annual income to buy a home in the formal housing market. Absence of credit (let alone tightness of credit) does not discipline house prices at all when you have land rentiers empowered by corruption and/or utopian urban planning. Some advocates want credit introduced “to make it easier for all these non home owners”, which is ridiculous except for the possibility that they can pay through the nose while they live in the house rather than scrimp mercilessly for decades in an illegal shanty while they save.

  7. The Horrible Scott Morrison MP

    You MB readers don’t understand proper Scottenomic theory. Healthily rising house prices trigger growth in the all important construction industry, which encourages immigrants to come in and meet the skills shortages we have. So you see, immigrants help to put downward pressure on house prices by helping in the construction of more houses. Prices only continue to grow because Sydney and Melbourne are Superstar cities, and because I’m the Superstar Treasurer helping ordinary mums and dads to keep their biggest lifetime asset.

    • As an aside, I was recently looking for a nursing home for a relative in a suburb near Brisbane. One of the homes was
      refurbishing rooms and needed tilers for wet areas. The initial people they hired were locals
      who did a crap job for a high price. The company that did the best job at a lower price used
      Afghani workers who may or may not have been refugees at some stage.
      Staff members who interacted with these tilers said that they were polite and showed a lot
      of gratitude for the chance they have been given in their adopted country. They related stories
      from Afghanistan that shocked the senior nursing home staff.

  8. Just one other point re rents and housing supply. The only way “rents can rise due to housing shortage” beyond a certain point, is by tenants crowding more tightly. Once a housing market has been rigged by utopian urban planning for a few years, everyone will be paying the maximum rent they can stand anyway. The only way “rents rise” further is by the renters sacrificing space rented. The amount each renter pays personally remains at “the maximum they can stand” and it can’t go higher than that, can it?

    Look at the social disgrace of Britain after decades of this unconscionable urban planning enabled racket. The rent that gets you a decent small stand alone house in a median multiple 3 housing market, in a British city will get you a crawl space under some stairs, or a 1/4 share in a bedroom along with a 1/20 share in a kitchen and bathroom. It is a scandal that Australia would repeat the same process,

    And in the median multiple 3 housing market the average housing unit size will be around 4 times that of a British city and the average per-person footprint on “site” terms around 10 times as much. Most people in Britain having no backyard at all, versus most people in median multiple 3 US cities having a 1/4 acre or more.

    • It is a barefaced lie for planners to be still saying after the decades of UK experience, that density per se enables affordability. There is not one single example from anywhere in the world, of this being the case. The exact opposite is true. The more you can deprive people of a basic necessity, the more you can gouge out of them in spite of the lesser and lesser amounts they consume. The same would happen with food, it is not rocket science.

  9. These outcomes suggest that dwelling prices tend to be influenced by factors other than what is suggested by fundamental metrics like population growth.

    LF Economics = Data Drongros

    I suggest to the sophists at LF Economics that they point their powerful statistical analysis in a less harmful direction and ponder this question instead:

    Does the increase in the number of girls drive the value of gold in Dowries?

    Or, if the LF Economists wish to better understand the housing situation, they could just read Phil’s response above.

  10. LF Economics analysis of Lithuania is seriously flawed. Lithuania’s population increased by 50% from 1950 to 1990 – a baby boom? its demographic was seriously distorted much like Japans. Their house price history graph is “similar” to Japan It would be fair to say as the baby boom matured to form their own households one would expect demand for housing to rise from 2000 onwards. Lithuania’s population has been in decline in recent years and note the house prices are well below their peak. Once again prices for real estate rise when there is an excess in demand whether it be demographic change or immigration.

    • I am struggling to understand how demand for housing could be expected to rise in Lithuania from 2000 onwards when by that time the population had been falling for a decade, and the rate at which the population fell accelerated in the first half of the aughts.
      A key aspect of your argument appears to be that household formation peaks when the babies born at the peak leave home – I guess somewhere between 20 and 30 years after the peak of births. In Lithunia’s case, with births peaking in 1960 that would mean the peak of household formation would have occurred somewhere between 1980 and 1990, which seems a long way from the peak in house appreciation in around 2004 – 2007.

      • Lithuania population growth from 1950 in the main was births (like other western economies baby boomers) kids live at home with parents, kids dont buy houses but eventually leave home and thats when demand for housing kicks in. The same thing happen in Japan, their baby boom started 10 to 15 years earlier than in the west and there real estate peak in 1990 never to return. Harry Dent Demographic analysis of Japan and impacts on Real Estate is and informative read. After all Japan went through a boom and bust without immigration, people were living longer and with the numerous baby boomers there was certainly a time when there was more people looking for housing than supply.

      • Yeah – so why did the big leg up in Lithuanian housing prices occur 15-20 years after the peak of household formation? The number of 25-30 year olds in Lithuania peaked around 1990 and has shrank dramatically ever since.To match your theory, the house price boom should have occurred in Lithuania in the mid to late eighties, not the mid 2000s, when there were fewer young adults around to form new households.

        The Western baby boom and the Japanese baby both started pretty much as soon as WWII ended – the notable difference was that Japan’s baby boom was actually over by 1955 at the latest, whereas in the west in continued almost to the end of the ’60s

      • Pretty hard getting data on Lithuania – But Japans baby boomer births peaked 1950 and was a rate 15% higher than the previous two decades where as in the US the peak baby boomer births was 1955 and a rate 45% higher than the previous two decades. In the US starting age for home buyers is 30 to 32 years of age. You’ll see in LF’s graph that house prices start to climb in 2000. Depending on the home buyer start age of Lithuanians demographics can not be ignored as LF economics has done.

      • Data on Lithuania came from UN population prospects – peak 30 year old in Lithuania was 1990. Unless they don’t start buying houses until middle age, or the UN is drastically out, the data doesn’t support your theory, as the big pick up in house prices started between 2001 and 2004.

      • So not due to demographics then, more to do with access to a great deal more money which wasn’t available at the actual demographic peak.

      • Generally buyers of anything will instinctive attempt to negotiate a lower price from a seller, buyers will only pay more if there is competition for the item they want to buy. Its not that money is abundant or cheaper that people wish to pay more. If it was only money this will not explain the dramatic fall in Lithuanian house prices some years later. The Lithuania population seems to have started to emigrate after 1990 but not enough to vent that pent up demand of baby boomers (demographic) which explains house price rises. The continued emigration of Lithuanians also explains the fall in house prices some years later. What LF economics fails to consider is that population change underpins the need and hence the demand for housing and as prices rise and fall accordingly. Now just may the Soviet occupation had something to do dampening free market forces – Heres another link
        http://www.truelithuania.com/soviet-occupation-of-lithuania-1944-1990-247

    • I used to work with a lithuanian bird in the uk a few years ago. She was proper fit. She loved home and away. And me with my tan. Her stories of growing up involved eating potatoes and dancing to some communist tune. I wouldnt read too much into house prices there.

  11. Financial markets rarely display perfect correlations with underlying fundamentals. As housing has become increasingly an investment market rather than supply and demand of an essential commodity – why would it be any different? Very few people these days just go and buy a house without taking some view on “the market”, even FHBs want something that will appreciate, build wealth, not just a place to live.

    Population growth is one factor, and especially so if people believe its a factor. It is woven into the narrative -we are running out of room, we have no choice but to move to higher densities, a backyard is becoming an unaffordable dream, there is a limitless pool of wealthy Asians who want to move here – and this narrative is the investment case that drives the market.

      • The great thing about the end of the Japanese fuelled boom was that only about 10 years later a country with more people and a faster growing economy came along to kickstart our economy again. Our future economic success is guaranteed as soon as we find another country with more people and money than China.

  12. In breaking news, LF Economics has released a study questioning the link between population growth and food prices.

    By turning their most powerful spreadsheet computer on data easily downloaded from the Internet LF Economics found no positive correlation between an influx of people and food prices in a given area.

    These startling conclusions have many implications for many markets throughout the world, and imply that unfettered population growth may hold the key to achieving low prices in a range of commodities from food to energy and housing.

    Simply by studying the data that could be found on the Internet about a refugee camp in Bangladesh and a lobster restaurant in Singapore, LF Economics confidently concluded that food prices are not primarily determined by population growth.

    With the refugee camp, LF Economics found data that indicated thousands of starving refugees faced a low price for food of less than a dollar per meal. Whereas in the lobster restaurant, food prices were many multiples higher, and yet there was a much lesser influx of people into the area. It didn’t take much commonsense at all to draw the obvious conclusion.

    • +

      Perhaps the article is intended to alert the FIRE sector that LF Economics know how (and are willing) to manipulate data in order to promote the interests of that sector, for a fee of course.

  13. There are many suburbs in Brisbane where the population has been in decline, like a Chelmer, Jindalee and Redland Bay. The prices have risen regardless of the population decline. Just saying….

  14. FiftiesFibroShack

    “One only has to look at the explosive price growth in Sydney and Melbourne, where values have diverged so strongly from the other capitals:”

    I reckon it’s more complicated than correlation equals causation. There are many drivers and they’re all linked and dependent on each other, and those dependencies likely vary by postcode.

  15. population growth does increase population growth but not nearly as much as what we saw in Australia in last two decades. If it was only population growth driving house prices they would still be less than half what they are now. House prices in our regional cities that barely grow or don’t grow at all are still more expensive than house prices in some of the fastest growing cities in the western world (Wagga Wagga and Mildura are more expensive than almost all fastest growing cities in US including Washington DC)