Why population growth isn’t to blame for rising property prices

Housing is shaping up to be a major election battleground as the federal opposition vows to dramatically cut Australia’s migration intake if it forms government, in a move it says will free up tens of thousands of homes.

But new analysis suggests population growth is not to blame for the worsening affordability crisis.

Rather, a ‘perfect storm’ of factors ranging from labour and material shortages to higher interest rates and increased investor selling has resulted in a housing supply shortage that will take years to fix.

“People think population growth is the most dominant factor influencing property market performance but it’s actually a very small one,” said Propertyology’s head of research Simon Pressley.

Using data from the Australian Bureau of Statistics, Propertyology has ranked the population growth of 120 cities and municipalities with more than 20,000 residents over the 20 years to June 2023.

“When we lined up the population growth rates against real estate capital growth rates, this 20-year period is another major parcel of proof that there is no direct correlation between these two metrics,” he said.

Take Sydney, for instance. Its property owners may have enjoyed significant capital gains over the last two decades, but they can’t thank population growth. The Harbour City ranked just 43rd in a list of Australia’s fastest-growing locales.

The top 10 growth spots were in the regions, eight in Western Australia and Victoria.

Top of the list was the WA coastal city of Mandurah, an hour south of Perth, which saw its population swell by 91%.

“For 14 years of that period it was Australia’s fastest growing population yet the median house price was unchanged,” Mr Pressley said.

Similarly, Victoria’s Surf Coast saw 85% population growth, WA’s Busselton 81%, Queensland’s Sunshine Coast 70%, and Mount Barker in South Australia 68%. Yet all displayed “underwhelming” property price growth during the period, Mr Pressley added.

In contrast, Noosa and Byron Bay saw phenomenal property price growth yet were “well below average” in terms of population growth.

The total national population increased from 19.7 million to 26.6 million over the two decades, a growth rate of 35%.

Of the state capitals, Perth (53%) and Brisbane (52%) had the highest population growth rates, while Adelaide (23%) saw the lowest.

PropTrack senior economist Paul Ryan said it’s easy to make the link between population growth and property growth, but noted the popularity of a place bears little to its population metrics.

“Where we build homes is where population growth is going to be highest so it’s a chicken and egg scenario. It’s the abstract concept of demand that pushes prices up, and population growth is only one part of that demand.

“And demand has waxed and waned across different parts of the country at different times.”

Where have property prices grown the most?

Since PropTrack started tracking its Home Price Index in 2010, the 10 areas to log the steepest price hikes were all in Greater Sydney.

The Baulkham Hills and Hawkesbury region saw property price growth of 177%, the Southern Highlands and Shoalhaven 171%, Blacktown 160%, the Central Coast 158%, Sydney’s outer west 150%, while the Illawarra, Sydney’s Northern Beaches and Sydney’s southwest all recorded growth of 148%.

“Sydney has the perennial appeal of being the biggest, most cosmopolitan part of Australia where wages are markedly higher than elsewhere and that has an impact on prices,” Mr Ryan said.

“People want to live where things are affordable, but also where they have the most opportunities.”

Hobart, as well as regional areas in NSW, Tasmania and Victoria, also showed significant price hikes since 2010, though in recent years, Adelaide, Brisbane and Perth have taken the batten.

“Before the pandemic, Perth saw an extended period of price falls and low demand, but now demand is extremely high and it’s really difficult to find somewhere to live,” Mr Ryan said.

What factors actually influence property price growth?

It’s buyer behaviour more than population growth that influences housing demand and property prices, Mr Pressley said.

“We only contribute to the population once by being born, but most of us live in multiple properties in different places throughout our lives,” he said.

“Overseas migrants also contribute to population figures but few of them buy a home inside their first few years of being here.”

Census data from 2021 shows that 38% of migrants owned their home with a mortgage or outright after five years, 71% after 10 years.

Buyer behaviour is shaped by economics, Mr Pressley said.

“Where the workforce grows, stability, income and confidence grows – and that’s when more people are at open homes and auctions.”

Mr Ryan believes there are three critical factors in property price growth: economic performance, housing supply and interest rates.

“Price growth over the past 20 years was fuelled by a mix of supply constraint and decreasing interest rates,” he said.

“So if we have higher interest rates and a higher growth of supply in the future, that may put downward pressure on both rents and property prices.”

Even Elin Charles-Edwards, an associate professor of human geography at the University of Queensland, underplays the importance of population in driving property demand.

“Population contributes, but it’s also our household formation and behaviours and how they change over time,” she said.

“For example, during Covid we saw a decline in average household size, so the number of households actually grew at a more rapid rate than the population overall.

“As the population ages, we know we’re more likely to live alone so that’s going to increase demand for housing. Shifts in the level of partnership also have an impact because we consume fewer houses if we partner up or if the kids stay at home for longer.”

Speaking at an event in Hobart this week, Reserve Bank chief economist Sarah Hunter said the average number of people living in each household has trended lower in recent decades, from around 2.8 in the mid-1980s to around 2.5 currently.

“This may sound like a small change. But, if for some reason average household size rose back to 2.8, we would need 1.2 million fewer dwellings to house our current population – no small difference,” Ms Hunter said.

Which parts of Australia will grow fastest in the future?

Ms Charles-Edwards said while fertility rates and life expectancy are relatively easy to predict, migration flows are less so.

“We know our population will continue to grow and age,” she said, with this increase attributed mainly to overseas migration.

Australia saw a net gain of 518,000 people due to overseas migration during the 2022-2023 financial year, while our natural population increased by 111,000 in the year to September 2023. 

When it comes to interstate migration, Ms Charles-Edwards said we can expect the continuing domination of our capital cities, including places once considered regional centres like the Gold Coast and Sunshine Coast.

“We do see periods where regions become more popular. There was a big redistribution to sea change destinations during the ’90s and the 2000s, and then we saw strong migration flows to the regions during Covid.

“But Australia has a very centralised population distribution and we’re not going to see a massive divert to the regions in the future.”

We can also expect to see an ongoing love for the Sunshine State, she added.

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March 2021 figures on interstate migration show Victoria and Queensland were the only states to show a net gain, which means more people arrived than departed.

All the other state and territory capitals recorded a net loss.

“Due to a combination of factors including the weather, the price differential and people returning, we’re going to see a continued shift to Queensland,” she said. “That we’re very confident about.”