This month we’re looking at change, and what better way to examine it than to look at how the property industry of Australia has evolved over the years. Almost everyone is thinking about affordability at the moment, so let’s look into what forms an affordable property by looking at data from the past and understanding what drives up property prices.
Have a look at this graph of the median Sydney house price from 1970 to 2003.
The trend seems fairly clear; property has come from low price origins to being one of the most expensive purchases an individual makes. So how is it that we’ve come to this point? Obviously natural inflation is one of the key drivers, but if it was just that the graph would not have such large price fluctuations. Rather than a steady climb, we have large jumps around 1986 onwards. So what else is going on here?
One of the larger drivers of property price is population. The more your population grows, the more property is needed. If supply doesn’t catch up then prices will increase, if supply is too high then prices will drop. The simple truth to successful property investing is that you must pick an area in which population growth is sustainable. If you can, investing as early as possible allows you to benefit from low prices before letting the property sit and grow over time.
Let’s extend this logic to the Australian market, with an obvious trend of population over time.
Population has gone up and up, so there has to be more property to support it. While this might not look dramatic, that is an increase of 9.4 million people over less than 40 years, or 235,000 people each year. So how does this graph relate to house prices?
New housing stock is not constant, so while population may be increasing consistently each year, housing prices will not be constant, as demand increases but supply inconsistently increases.
This alone is not enough to cause the fluctuations in price which we have seen in Sydney, however in a micro sense it does logically give reason as to why a property may well be worth $500,000 one year and $600,000 the next.
There can be a lot of complexity in understanding the role of the economy on housing, however this page by the Parliament of Australia effectively sums up the main points. To briefly summarise; a strong economy allows for higher incomes, which pushes up the disposable income of all individuals. To match this, property prices become higher than what the market can bear. Demographic changes can lead to changes in house prices, especially when considering immigration. Average house sizes and number of working individuals as part of a couple can also impact the typical price of a property, all in line with affordability.
LOWER INTEREST RATES
From when interest rates peaked in the late 80’s to the current day, the amount that an individual can borrow has increased significantly. This has allowed individuals to purchase properties they otherwise would not, or simply speaking, a higher valued property can be purchased using the same deposit amount. On a 30-year mortgage of $100,000 at an interest rate of 14% as can be seen around the late 80’s, repayments would be around $1185 a month. Fast forward to the current day, and the same monthly repayment can service a loan amount almost $80,000 greater!
TYING IT TOGETHER
All this data is great, but what does it all mean? How does it all relate to one another?
Put simply, the property industry is not a static entity. There are hundreds of factors that all influence the demand and supply for housing, with the above mentioned only being a few of the main characteristics. Nobody can predict the future, but we can isolate a few of the characteristics we think are most important for determining success of a property, and then apply them to the nation as whole. From there we can understand what area is likely to perform the best, and thus where we should invest.
Did we miss something? If you have an opinion on what drives property prices, be sure to leave a comment below!