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What Drives Property Prices
Price growth in Australian residential property markets is basically determined by the forces of supply and demand in two major sub-markets – owner occupiers and investors. Owner occupiers tend to focus on lifestyle choices and affordability criteria that will best satisfy their needs. Investors focus on net returns – resulting from either capital gains or cashflow (or both).
Population & Migration growth: A growing population means more roofs over more heads. Australia recently
passed the 20 million mark of which over 4.16 million live in Sydney. Our low birth rate is supplemented by
immigration which will see our cities continually grow.
Interest rates: The cost of credit is a key driver in determining price growth. This factor is closely tied up with
affordability as the cost of finance determines serviceability and the amount that people can borrow.
Demographic trends: The ABS report that the number of households in increasing but the average household size
(now at 2.5 persons per home) is becoming smaller with families having less children, more childless couples,
divorce rate increasing, more one parent families and other social trends.
Construction costs: Increasing costs of labour and building materials has a direct effect on house price growth. As
the demand for housing increases, construction activity increases as will the demand for trades and materials. The
ability of the housing market to absorb increased construction costs will in turn be determined by the position of the
housing market in the economic cycle. There is often a lag between the time that price signals get through to
developers looking to cash in on the boom times.
Market sentiment: How people feel about the direction of the property market and how they respond to media
reports plays an important role. People like to avoid risk and feel safe about buying property. Nobody wants to pay
too much for a property. When market sentiment is high, boom periods tend to follow. As the market sentiment falls, buyers and sellers adjust their expectations. Purchasers tend to adjust their price expectations downwards more quickly than vendors. However, vendors are also purchasers and purchasers become vendors at differentpoints in housing cycle. While in 2003 was a sellers market, 2005 has become a buyers market and vendors are having the meet the market to get property sold.
Affordability: The demand for property is closely related to affordability. The simplest measure of affordability is the
percentage of average wages used to service the average mortgage. If most social groups find that housing is
unaffordable, then this will reduce demand for housing. This is exactly what is happing at present in Sydney and
Melbourne. There is a temporary adjustment in the usual upward rise in average prices over time. Low interest
rates, easy access to credit and the demand by baby boomers for financial independence in retirement has resulted in strong property demand in recent years.
Land shortage: Sydney provides the classic case of land shortage. Land shortages have consistently driven
property values as demand outstrips supply. Planning future land releases and providing adequate infrastructure do not come overnight. This is a perennial problem that the State Government has been grappling with for decades.
Since new land releases take considerable time and are very costly there will continue to be demand for houses and land in excess of supply.
The tireless forces of supply and demand will continue to work its way out in the marketplace regardless of market
sentiment. The head of Australand Property Group, Brendan Crotty, is predicting an upswing in housing demand is
likely in the next 6 to 9 months. This view is based on the key predictor of housing demand being growth in full time
employment. Crotty was recently quoted in the Financial Review as saying that “You don’t go to a capital city to live
there….you go to work. Any every new full time job flows through to one extra dwelling. It’s quite a good predictor.”
In the last two years job growth has been highest in Melbourne (76,000 new full time jobs), Brisbane (62,000) and
Perth (31,000).
The most interesting thing about these figures is the 10 year average annual growth. Look at this last column above
again……the average is almost 10% pa growth which confirms what property history has been doing for the last 100
years. The rule of 72 says that property values double every 7 years (based on 10% growth). While we are unlikely
to see even growth each year, history has shown that falling or stagnant property markets are temporary, and always
recover and then exceed the levels from which they previously peaked.
The current real estate market can be characterised by:
• Prices are falling or increasing only slowly
• Less investors (less competition)
• There are generally fewer buyers
• Properties are on the market for longer
• Rental vacancies declining/ more people renting
• More properties are sold at prices considerably below asking prices
• Rents may start to increase
• Agents actually call you back and chase you to get a sale.
Albert Einstein suggests that in the middle of difficulty lies opportunity…….. the same applies to the property market.
With a down property market opportunities abound! The key is to recognise value and only purchase properties
which have the correct fundamentals for:
• future capital growth
• adding value/ renovation
• development potential
• strong rental yields.
This article was written by Rich Harvey, founder and Managing Director of propertybuyer ®, Sydney & Australia’s
leading Buyers Agents. propertybuyer ® helps property investors and home buyers make wise buying decisions,
sourcing properties with high capital growth potential.
Rich Harvey
Managing Director
propertybuyer™
Tel: +61 2 9975 3311
www.propertybuyer.com.au