Changing demographics will drive our property markets

Australia’s property markets are driven by our demographics: who we are, how we live and where we want to live.

Sophisticated property investors are students of demographics, so I found a recent Goldman Sachs report, A Study On Australian Housing: Uniquely Positioned Or A Bubble? an interesting insight into the different forces driving our housing markets.

In summary it says we are setting the scene for a chronic housing shortage due to the combination of two factors:
1. Our increasing population and;
2. The growing number of people in the key household formation age – 25 to 29-year-olds.

The report points out that Australia’s population has been growing by around 2.1% per annum, which is faster than any other developing nation. In fact, we’re growing at a rate more reflective of a developing nation than of a wealthy developed country.

While we are experiencing a baby boom, two-thirds of population growth is due to immigration. Sure this is now slowing, but the trouble is that over the past six years we haven’t built enough dwellings to meet the needs of our surging population.

Just as importantly the report explains how our changing demographics will alter the housing landscape in the future as we experience a huge change in the demand for housing, as the children of the Baby Boomers will hit household formation age. According to Goldman Sachs, over the past five years, there’s been a surge in the growth rate of the 25 to 29 age group – which has been rising by an average 3.7% each year. This will result in an average 2.7% annual growth rate in the 30 to 34-year age group in the five years to 2016.

This is a dramatic increase, considering these two age groups averaged growth rates of less than 0.3% per annum for the 15 years up to 2006.

The report estimates there’s a national shortage of around 157,000 dwellings now and estimates the housing shortfall will increase to 250,000 units by the end of 2012. Of course, this type of claim is nothing new and is in line with reports by other economists, including the National Housing Supply Council study.

This ongoing shortage of dwellings is one of the reasons I feel confident our property markets won’t collapse as some overseas economists are suggesting.

But don’t get me wrong, it doesn’t mean property prices will keep soaring either. This will depend upon interest rates, affordability, the state of our economy and consumer confidence. And currently the property markets have slowed down. They are catching their breath after a year or more of heady growth.

And the shortage of dwellings isn’t evenly spread. We are building enough house and land packages in the outer suburbs and we are heading for an oversupply of inner city high-rise apartments. Where we are short of properties is in our inner and middle ring suburbs, where developers can’t get medium density projects out of the ground, yet where there is strong demand.