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More people, more growth

More people, more growth

It’s a common belief among property investors that population growth and capital growth always walk hand in hand. Property economist Ed McKnight disagrees.

8 March 2022

Most property investors happily agree that strong population growth equals a faster rise in house prices, otherwise known as capital growth.

This traditional assumption seems sound. A rapidly growing population needs more homes. Ergo, more demand for housing would seem to drive the dollar figures upwards.

And let’s not forget that growing populations can support more businesses, more business means more jobs, more jobs means more income to support higher prices.

So, for investors, this means the best place to spend your money is on property in areas of high population growth to see a better return in capital growth. Right?

Well… it’s not that simple. Investors often think about the demand side of population growth. But they forget the supply response.

More houses

You see, a growing population increases the demand for houses. But the supply of houses isn’t fixed. So if you boost demand for housing, people often build more properties.

Developers are more certain that there’ll be people around to buy the houses. A slight uplift in prices from population growth will make more projects profitable, so more properties are built.

So, just because more bodies need more places to live, that doesn’t mean prices surge automatically.

So let’s look at the data to see the relationship between annual population growth and annual house price increases (chart above).

It’s important to note that the date range shown in the chart ranges from 1996 – 2018, which was the latest data we had at the time we went to print.

So what trends do we see?

There is a trend ... but it’s not 1-for-1

To begin, extra population growth does correlate with higher house prices. This we expected. But the effect isn’t 1 per cent population growth = 1 per cent house price growth.

Instead, the trend over this period was 1 per cent population growth turned into an extra 0.4 per cent of annual house price growth.

Take for instance, Dunedin vs Tauranga City.

Dunedin had population growth of 0.3 per cent a year, while Tauranga saw 2.4 per cent a year.

By this measure, the trendline says since Tauranga got 2.1 per cent more population growth, it should get about 0.8 percentage more house price growth.

So, how did house prices go over that time?

Dunedin City: 5.4 per cent a year. Tauranga City: 6.3 per cent a year.

A 0.9 per cent difference – not far off what the the trend suggests.

Zero population growth ≠ zero house price growth

All this said, you don’t actually need population growth for houses prices to inch upwards. In all cases, areas with declining populations still saw house prices increase.

Take Ruapehu District, for instance. Between 1996 and 2018 the population declined by 1.43 per cent a year.

This suggests a declining need and less demand for houses. But, over this time, house prices still increased 4.67 per cent annually.

It’s a trend, not a rule

While there is a trend, it doesn’t hold in every situation.

There are some cases where population might be high, but that specific council area didn’t see higher house price growth over the period we looked into.

For instance, Selwyn District had enormous population growth, but not an enormous amount of capital growth within this period.

Why? Let’s take a look at Rolleston (in the Selwyn District) as an example.

People moved to Rolleston after the Christchurch earthquakes. That’s because the land was cheap and the ground underneath was solid.

At the time, the town had plentiful land supply and house building was strong. So, demand was strong, but so was supply … even as Cantabrians flocked there in droves.

So, at this time, we didn’t see the demand versus supply imbalance that tends to cause house price rises.

However, one thing we didn’t see in the data (since it stops in 2018) is that since then, house prices in Rolleston have skyrocketed by over NZ$150,000.

Why? a) Because of the same factors that the rest of the country has seen: low interest rates, and high FOMO (fear of missing out). But, b) because the land is no longer as plentiful, house building is now restricted, while the population is still booming.

So… what’s the takeaway?

There appears to be a correlation between population growth and faster house price growth, but it’s not a slam dunk for population growth.

In other words, when you’re searching for investment properties, population growth should be one factor you consider, but probably not the only factor.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.