Population Growth = Value Growth? – NOT ALWAYS

At our final Property Wealth Forum event for 2011, my team and I busted a dozen myths about what drives property values. One of the biggest myths we busted centred around the view that if you get population growth you will naturally get growth in property prices.  Not entirely true – let me explain.

Population is seen as a demand driver of value, in the sense that you usually see the value of a good increase, if there is strong demand.  Well that’s not completely true.

In basic economics just having a demand driver won’t guarantee the value to rise.  You also need to have another critical component and that is the ability to purchase or afford to buy that item.

If a good is not affordable within the marketplace, then its value will hit an ’affordability ceiling’.  Sure, many people might still want to buy the good, but if it’s out of their price range, the demand driver of wanting the item cannot be satisfied.

Property is no different.  Let’s assume that we have thousands of people all keen to move to one location – we certainly tick the demand box, but what if all those people can’t afford to buy property in that location.  In other words, they can’t secure a loan to purchase the property based on the incomes they earn?

Property prices would not be able to increase unless new people moving to the area had greater incomes to drive up the vales. Otherwise values will only increase inline with the increases of the wages of the population within that market.

Population does play a role in values from a supply sense – if the population is growing then supply needs to continue to meet the increasing population, otherwise a supply shortage will put pressure on stocks.  So population or more importantly people to fill the properties being built need to keep arriving.

Smart investors place their money in locations and properties where income growth is tipped to grow quickly, where if people had a choice and they could afford it, they would want to live in this location, where supply of quality property is scarce, where job prospects to earn stronger incomes is greatest, just to name a few…….

So don’t be sold on a population story alone, the real art to selecting high performing property lies deeper than a general macro driver like population. Population alone is a con sell job and you may live to regret it, when your investment turns out to be a dud over the long term.