What is the population debate going to do to our property markets?

One of the hot issues for the upcoming election is population growth and immigration. This is obviously very important for property investors because our population growth has been driving the demand side of the supply and demand equation, and has been one of the major factors giving our property markets the boost they needed to keep rising.

So the question we have been asked by our politicians is: “Do we want a big Australia or sustainable population growth?”

My answer is we need both – they are not mutually exclusive!

I have just come back from a property conference in New Zealand where I was the keynote speaker. I shared the stage with a number of Americans and after hearing firsthand stories about the state of their economy, I’m really glad I live in Australia.

And it was much the same for the state of the New Zealand economy. Those in the know were saying they wish there were more of the right type of migrants coming to New Zealand – ones with money and skills who could boost their economy.

But back to Australia… we must populate or we will perish. Just look at what has happened to Japan, America, Germany and even our neighbours across the ditch in New Zealand as they let their populations stop growing and age.

Since World War II Australia has accepted more than six million migrants into Australia from over 200 countries. More than 40% of Australians were either born overseas, or had one or both parents born abroad. We are one of the world’s most successful and diverse multicultural societies in the world.

Let’s be honest … we are an immigration dependent society.

You’d have to be living under a rock not to know that we have had a surge in population growth over the last few years, with a baby boom plus strong migration. But a soaring population has placed severe pressures on some of our major cities. In the past five years the population of Melbourne has increased by 370,000, Sydney by 290,000, Brisbane by 219,999 and Perth by 199,000.

In fact, we were growing at a rate faster that any other developed country and at a faster percentage than India. Maybe we got a little ahead of ourselves as our population grew at around 2% per annum, however over the past 10 years our population growth rate has averaged just 1.5%. Interestingly I recently read that over the last 10 years our demand for labour has been increasing at a rate of around 2.5% a year.

Can you see where that is heading?

While we’ve been closing the gap between a dwindling labour force and an increasing need for labour by greater participation in the workforce and extra productivity, now with unemployment at historic lows, if immigration fails to keep pace with labour demands we are going to have acute labour shortages.

This means wages will increase, as will inflation and interest rates will go up.

What does this mean for property?

Our markets are likely to perform well initially, as everyone feels smug about their higher paid jobs, but eventually higher interest rates will slow the economy and stall the property market (as they have at the end of every other property cycle).

But it gets worse…

The first round of Baby Boomers are reaching the official retirement age and over the next 15 years 4.5 million Boomers will move into their retirement years.

Currently these Baby Boomers make up a large part of our workforce yet many have had their superannuation decimated by the Global Financial Crisis, which means they are going to have to rely on the pension. And they’re going to become more reliant on our already full hospital and medical systems.

Remember, these Baby Boomers have paid taxes all their lives are now going to stop contributing to the economy and are expecting something back form the government. They expect the government to provide for them in the way of aged care, health care and pensions.

This means the government of the day will have two choices – cut pensions and health care or tax the remaining workers more to help cover the shortfall in income tax and the extra cost of these services. Both are political suicide.

There is only one answer, as I said before: populate or perish. We are going to have to increase our levels of immigration.

Rather than wait until then (which could be just around the corner) I suggest our government take the emotion out of the debate and get real about population growth.

There has been a lot said about the Treasury estimates of a population of 36 million by the year 2050. However little has been said about the fact that this estimate is based on consistent immigration numbers of 180,000 each year. Anyone who has been keeping count will know that over the last few years our population has grown by almost double that rate.

Both sides of politics have recently suggested they would allow around 170,000 people in each year. This drop in population growth is likely to lead to all the issues I mentioned before and their serious economic consequences.

As Stephen Lunn recently said in The Australian: Voters shouldn’t be afraid of a future population increase, for Australia can survive, indeed prosper, with more people. They should be afraid the government of the day will use the immigration issue to take the heat off providing better services and infrastructure. Better planning for population growth is the key.

So if we need all those people, where are we going to put them?

If you think about it, most of those who are going to come to Australia will be used to living in bustling, crowded cities and are likely to want to live near their work, entertainment, hospitals, universities and a variety of amenities.

Our capital cities will begin to look like the other mature capital cities of the world. We may not all have a back yard, but who wants a back yard if you can’t water it? Especially when the majority of households will only have one or two people living in it.

This will mean we will need more medium density dwellings. At Metropole, our research has found that 20% of the properties that will be required by 2030 haven’t even been built yet.

This increasing demand and lack of supply will create strong capital growth for medium density properties close to our CBDs, infrastructure and amenities.

Yes, property values are going to keep increasing.

What about affordability? Well, there will always be affordable housing. Just go to regional Australia or way out in the new suburbs. The problem is most people just don’t want to live there.

In summary, we have no choice – we are heading for a bigger Australia. But we need to plan for it and ensure we have sustainable growth, to provide our residents with the infrastructure, services and amenity we have come to enjoy.

What are your thoughts on the population debate? Please leave your comments below.

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.