There are many factors that go to making up what affects the rate of change of real estate prices. Any real estate investment decision you make must consider these factors in terms of your timing, where and how much you can (or should) reasonably pay for your future property.
- Interest rates – lower rates for a better chance of upwardly moving prices, higher rates tend to flatten or drop markets.
- Finance availability – the more money available, the more people can spend – prices move up. If money is tighter, people have less money to pay with – property doesn’t get sold and prices stagnate or move down.
- Number of listings – the more listings on market, the more choice and less competition, prices move sideways or down. If there are fewer listings for the same number of buyers, bunfights can happen and prices can move up.
- Vacancy rates – below 3% is considered tight for the market and rents can move up, meaning values may move up. Above 3%, rents can ease leading to lowering in values.
- Rental amounts – if rent is “cheap” people have less incentive to buy and prices may ease. If rents are expensive and moving up, people look to buy, increasing demand and eventually prices move up.
- Average days on market (before sale) – the longer this is the worse it is for values. 30-60 days is about normal in most markets – less than this and you have big demand, prices move up. More time than this and there is less demand for what could be more property available for sale – prices drop or stop.
- Government Grants & Incentives – for first home buyers (cash) or investors (deductions) can bring people in to the market and drive prices up, or push them away if incentives are withdrawn.
- Employment – obviously the better the employment figures and wage rates, the more money people have to spend. If the buyers have more money they can pay more for property. High unemployment locations generally see prices dropping.
One of the most important, and in my estimation, under rated factors in property price changes is people. That is where they are, where they are going – and most importantly – where they want to live.
I’m talking about population growth – either by natural process or by immigration.
The ABS figures show that Australia’s population broke through 24 million during first quarter of 2016, with an estimated resident population of 24.05 million at the end of March. This was an increase of around 327,600 people over the year and amounts to 1.4% annual growth.
Net overseas migration (incoming minus outgoing migrants) contributed 180,847 people to the increase over the year ending March 2016, and the net inflow was around 2% higher compared with a year earlier. Natural population growth (births minus deaths) added 146,763 people to the population over the year to March 2016, which is down by about 5% compared with the previous year.
Australia has had an average population growth then of 1.4%, which is somewhat higher than other comparable first world Western economies. (Germany 0.5% UK 0.6% USA 0.7%) The world average over this time was 1.2%. New Zealand took us out with an impressive 1.9% population growth.
There is a good argument that overseas migration has kept the Australian economy moving. Personally, I think that this country can support many more people seeking a new chance in life and an opportunity to succeed. I don’t mind where they come from, but I do want our new Australians to bring the best of what they have and add it to our culture, leaving behind any old troubles, on their way to becoming good Aussies.
Understanding where the new Australians want to live can help you design your property portfolio, assuming you plan to get in on the migration wave. Have a look at the chart below – I know the quality isn’t perfect but it’s readable.
Victoria has the largest percentage growth and actual number of new population. It is no accident that Victoria currently has the best performing economy in Australia and its housing market is taking up where Sydney has left off. That being said, NSW has the second largest actual population growth and the second highest percentage growth and its market is still moving along nicely. These two states represented population growth of a little more than 218,000 people, which is 66% of all of Australia’s population growth.
Is it any wonder that this is where housing prices have been and still are been driven up fastest?
Other investors think differently and will look longer term and endeavor to counter cyclically buy at big discounts. If this is you, perhaps you might consider Perth (which had 1.2% population growth) over the next 12 months – assuming you believe that WA has a bright future when the commodity cycle turns again?
To make a lot of money in real estate, follow the people. Find out where they are going and more importantly what they are buying.
My take on that is that they are for the most part buying affordable home & land packages or townhouses within 20-40 minutes (by train) from the CBD, in suburbs that have good shopping, schools, medical and recreation infrastructure. One of the key operative words here is affordable.
For your next investment please consider following the people.