Is population growth always an indicator of higher property prices?

There’s a widespread narrative in property circles that assumes population growth is a good thing, and that more population growth is a better thing.

High growth population areas are seen as predictors of sure-fire real estate capital growth. But what if ‘it ain’t necessarily so’? What if some low-growth regions can see prices rise faster than the market average?

Population growth is a key driver of demand but all population growth is not equal. Australia’s current rates of population growth are driven almost entirely by net overseas migration – which has accelerated massively in recent years as this chart shows:

For sure, that growth is putting a lot of pressure on house prices and rentals in capital cities, because that’s where most of the new arrivals seem to want to live. More demand, less supply equals escalating costs, as economics 101 rightly teaches us.

But there’s another dimension to this.

High growth of lower income populations can only have limited impact on prices due to income limits. A large proportion of international migrants are neither capital nor income wealthy, hence their capacity to pay has limits. The population pressure that would in theory translate into rising prices instead is felt at the lower end of the real estate spectrum, especially in housing rental shortages.

High growth regions can also exhibit other signs of growth stress – from overcrowded hospitals and schools, declining standards of urban amenity, and so on. This is not the environment for capital growth.

Looking beyond population hotspots

What happens if instead of looking for ‘population growth hotspots’ we simply ask where high income people most want to be?

In many cases, the places most in demand by Australia’s wealthier residents also have significant limits on growth – either deliberately through things like population caps, or inadvertently thanks to the weaponisation of planning by NIMBYs and others.

This can translate into limited growth because adding supply is a challenging process. In these cases, high demand does not equate to high growth because supply is unresponsive. And the wealthy will want it that way, doing all they can to protect the features of the area they find appealling, without more supply adding more crowds, congestion, or “devaluing” the visual amenity (however they choose to define that).

What does respond though is price.

This is typical of many highly desirable suburbs of our major cities.

New supply – even in apartment form – is fiercely resisted, while demand escalates - making them a pressure cooker for prices. No population growth in this equation.

Regional, global examples of the population conundrum

This can also be true of regional resort areas.

Think Noosa in Queensland. Highly desirable – and now in the top 10 of state house prices at over $2 million (having doubled in five years).

But population growth at 1.8 per cent is below the average for the southeast of the state. The local council had plans to “cap” its growth to 56,500 but that’s already been exceeded, though not without a fight.

The Queensland State Government wants to see more housing (and more growth) in Noosa but the locals and their council are fighting it, DA by DA (development application). Supply – and therefore growth – will be limited, meaning even humble abodes will continue to be hotly contested by the wealthy, driving prices up.

Another example is the coastal California town of Carmel by the Sea. Located two hours south of San Francisco, the Carmel area also features the world-famous Pebble Beach Golf Club. It’s been a favourite of big money from Silicon Valley for years and accordingly drew a lot of developer attention. But it also had a mayor who was opposed to a massive increase in supply via a surge of proposed condos.

That mayor’s name was Clint Eastwood. The “make my day” Hollywood star defied the developers and ensured that many of Carmel’s original features were protected from development. There’s accordingly been very little population growth. Carmel’s population is still less than 3,500. That’s barely a village.

The whole of surrounding Monterey County is only around 430,000 and has grown by just 4 per cent in 10 years (compared with 8 per cent across the rest of the US). But that’s actually helped real estate skyrocket. There’s nothing like scarcity to drive markets crazy, and Carmel’s house price is now around $3.2 million. Five years ago it was half that. The better positioned homes in Carmel are all over $5 million and $10 million plus homes are common.

Sure, these are outlier examples, deliberately chosen to show that population growth isn’t always an indicator of capital growth.

You could scan tables of population growth figures by suburb but you’d be wrong to assume those with the highest growth rates will also be those that will record the greatest price growth.

Will immigration reductions hit property prices?

Predicting house prices is fraught with difficulty and in truth, few get the specifics right.

It’s easy when a rising tide lifts all boats – as we are tending to see now but if the Federal Government moves to severely curtail immigration numbers – and this slows population growth – what will that mean for house prices generally?

Remember that in many areas, prices still did well despite virtual zero population growth during Covid lockdowns.

There will still be internal population flows from one region to another but these may not all bring with them the promise of capital gain.

The message here is that prices can grow – and do – in low population growth markets. The hidden force at work in these circumstances is capital. The old adage of “follow the money” may be worth keeping in mind, even if population growth is slowed dramatically by the Federal Government.