Low interest rates alone don't explain house price boom – demographics are also key

The Reserve Bank governor Philip Lowe has acknowledged that lower interest rates had pushed up Sydney housing prices during the 2012 to 2017 boom.

"I think that’s pretty clear," he acknowledged when recently addressing our federal politicians.

But he went onto say there were other things that were "probably more important over the past decade".

"They go to population growth and the slow response to that on the supply side," he said. 

Lowe pinpointed that population growth picked up in Australia quite a lot and it took almost a decade for the rate of growth of the supply to respond to that.

He added he was raising the topic in the context of the next phase in the housing market.

"Because what we’re seeing at the moment is quite strong population growth, which I think is good, but the additions to supply of the housing stock are slowing right down.

"New development is slowing down, and one of the issues we’re going to keep a very close eye on over the next little while is what the supply of housing is doing.

"If developers cannot get financed, the supply of housing will slow a lot and we will be sowing the seeds for the next upswing."

The property market is a dynamic entity, always evolving.

One of the great marketing tools bandied about the market is that strong population growth is an indicator of future price growth.

But not just by itself as the governor advises this point fails to heed the impact of supply and demand.

Australia's population stands at around 25.4 million, up 404,000 in 2018.

The ABS calculates one birth every 1 minute and 40 seconds, one death every 3 minutes and 19 seconds, one person arriving to live in Australia every 56 seconds, one Australian resident leaving Australia to live overseas every 1 minute and 53 seconds, leading to an overall total population increase of one person every 1 minute and 13 seconds.

NSW's population sits at just over eight million, up 1.6% last year.

Victoria recorded the highest growth rate of all states and territories at 2.2%. The Northern Territory recorded the lowest growth rate at -0.4%.

Capital city growth accounted for 79% of Australia's total population growth. The capital city with the largest increase in population was Melbourne (119,400 people), followed by Sydney (up 93,400 to around 5.2 million) and Brisbane (50,100).

The fastest growing Sydney localities were around Riverstone, Marsden Park, Cobbitty, Leppington, Rouse Hill and Beaumont Hills.

Taking a look at dwelling approvals, which of course don't all get undertaken, Australia's new housing pipeline currently sits at a five-year low.

The rolling yearly total sits around 199,000, official figures show.

The peak was 232,000 approvals in 2015.

It hasn't been lower than 100,000 nationally since 2001.

There were 180,000 plus peaks in the mid-70s, late 80s, mid-90s, 2000 to 2004 and 2011.

It was running at around 70,000 in the 1950s. 

NSW's approvals peaked in 2017 at around 70,000.

Housing markets are not homogeneous across Australia’s states and territories, or even in neighbouring suburbs.

The relationships between housing markets and the broader demographic shifts are complex, although conventional wisdom does suggest house prices are primarily influenced by the factors headlined by interest rates, building activity and population growth.

When house prices move in an ‘abnormal’ way it is often because one or more of these drivers become distorted relative to their ‘normal’ settings.

This article was first published in the Saturday Telegraph.