Our population boom will drive up property prices

When I read the recent population growth statistics I came to two conclusions: 1. Santa is going to be busier than ever this year- lots more people to visit!
2. Property investors are in for a good time, as the supply and demand equation will keep driving up property values.

The good news is that the Australian Bureau of Statistics data shows that our population grew by 2.1% for the year ending March 2009, the highest recorded since the baby boom era. And this growth rate is expected to rise in the coming years with Treasury predicting a population of 35 million by 2049.

Where are we going to put them all?

Let’s take a quick look at what this means for us as property investors…

Tony Richards, Head of the Economic Analysis Department at the Reserve Bank of Australia (RBA), says that based on an average growth rate of 2.1%, the demand for new dwellings will be 165,000 each year, however it’s unlikely this demand will be met as we’re only building a round 130,000 new dwellings annually meaning a shortfall of around 35,000 each year, adding to our already existing housing shortfall.

We already know that property values depend upon the supply and demand equation. Between the growing population and the declining average number of persons in one household, the demand for more homes is growing even faster.

Increased demand, insufficient supply – there is only one way for rents and property values to go – and that is up!

Where are all the people going to live?

Currently 70% of people live in and around our capital cities and it is suggested that this proportion is going to increase over the coming years to closer to 80%.

More new migrants and immigrants moved to Melbourne than any other capital city over the last year, while Queensland was the most popular state with a 20,000 increase in population. Meanwhile, NSW and South Australia were the places people were most likely to relocate from, losing 21,900 and 5,000 persons respectively. South Australia and Tasmania had the lowest average growth rate, at 1.2% and 1.0%.

Here are the numbers in more detail:

What this means is that we are in for a period of strong property price growth. Australian house prices are likely to boom for at least three years according to BIS Shrapnel chief economist Dr. Frank Gelber.

”This is only the beginning,” warns Gelber. ”The market will continue to grow, maybe not at this frenetic pace, but we need to build more to satisfy demand and we’re not doing that. By the time this is over in three or four years time, we will have built momentum into a boom… and if we’re not careful, a price bubble.”

Dr Gelber is very bullish, arguing that now is the first time since 2003 that there hasn’t been a brake on the property market. ”Every time the market wanted to break out, something stopped it,” Dr Gelber said. ”Interest rate rises, the financial crisis – prices started to rise and then they were stopped again.

”Now there’s nothing to stop it. The trouble with keeping a lid on a pressure cooker is that when it comes out it comes out really strongly.”

I agree with Gelber as significant price rises are necessary in order to fuel much-needed construction, in particular of medium density apartments and townhouses. Prices are going to have to increase by 20 to 30% before developer’s profit margins will be sufficient for them to undertake the risk of property development and before banks will fund new developments.

Hold on to your hats – 2010 is going to be a great year for property investors.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.

Look out for the newly updated 3rd edition of his best selling book How to Grow a Multi-Million Dollar Property Portfolio – in your spare time.