DWELLING PRICES, WORKING AGE POPULATION, & MIGRATION

Long-term prices, including those for dwelling prices, are driven by supply and demand. 

However, prices can deviate around their long-term fundamental trend, because of sentiment. 

The ideal situation for long-term investors, is to acquire assets that have sound long term supply/demand characteristics, and to acquire at a time when prices are below long-term trend due to negative sentiment.

This note looks at some key long-term drivers of the demand for Australian residential property.  These include:
• population growth
• migration, and
• very importantly - the population growth of working age people.

The population growth of working age people is important because it is the workers that create a nation’s wealth, and a large share of this created wealth finds its way into residential property.  A recent study published by the Reserve Bank, showed that across 18 developed countries, since 1970, inflation-adjusted residential property prices consistently grew about twice as fast as wealth.  This was because people choose to apply more of their increased wealth into their home, than into other assets.  This result was consistent across countries and time periods – see http://www.compasscapital.com.au/report30-2009-01-world%20housing%20boom.html

The global body, OECD, has recently released a report on working age population and migration from 2005 to 2020. 

The OECD chart below shows that even if Australia stops all migration, it will still be one of the very few developed countries forecast to show growth in its working age population.

That is, Australia’s working age population is forecast to rise by 3.2% by 2020, even without the benefit of migration.

Of course, migration will not be zero.  For the foreseeable future, migration will continue from the developing nations to the OECD countries, as people seek a better life for themselves and their families.  The developed nations will tend to encourage migration from people of working age, so that the immigrants will be able to make a contribution to the wealth of their new country.

The next OECD chart shows the effect of this.

 
The red dots replicate the previous chart – eg, growth in Australia’s working age population without any net migration will be about 3% by 2020.  However, taking account of forecast migration, Australia’s working age population will rise by about 7% by 2010, 11% by 2015, and 14% by 2020.

This is the developed world’s fourth highest growth rate of working age population. 

The continued growth in Australian workers, together with non-workers living longer, and the current huge under-supply of dwellings ( see http://www.compasscapital.com.au/report32-2009-05.html ), will inevitably put upward pressure on dwelling prices.

With current high rental returns, the long term fundamentals for investment in residential dwellings are good. 

With sentiment remaining mixed, now is a good time to be investing in certain areas of Australia.  Some investments are cash flow positive, even if all acquisition costs are borrowed.