What Drives Property Prices?

What Drives Property Prices?
An Editorial By Phil Anderson · Tuesday May 27th

 

I am sure this will not be news to many of you, but when we boil it all down all that drives property prices is simple supply and demand. Basic economics tells us that as demand rises and supply falls, the price of that commodity (in this case, Real Estate) increases. But if we dig deeper we must ask ourselves the question, "What drives Demand?". Today we delve into one of the biggest drivers in any property market, local employment, and how the upcoming shifts our country faces in the future may affect investors.

One consistent driver of supply and demand for housing is job creation and people are often happy to move to where they can get the right employment opportunities. This obviously puts upward pressure on the local rental market in those areas where employment opportunities are highly desirable.

If the current vacancy rates in those areas are already at average Australian levels (below 3%) these markets will soon become very tight rental markets pushing up rents and setting up an environment that is highly favourable to landlords.

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In fact, when there’s strong growth in local employment opportunities, the confidence flows onto existing homeowners who also contribute to the local property market by upgrading their family homes through renovations. Plus, first time homebuyers also enter the market at this time, tightening stock availability even further.

With most Australians feeling uncertain about many elements of the national(and world) economy, A-Grade investors are seeking out property markets that are about to get a huge boost from large volumes of short and long term job growth.

Most of this job growth will go hand in hand with major infrastructure programs that will produce sustained employment long after the infrastructure is completed. Examples are major airport/rail/highway upgrades, hospitals, shipping ports, universities, retail shopping centres, etc. In many cases an A-Grade investor will target areas featuring a long list of these sorts of major infrastructure upgrades.

Over the past 10 years Melbourne has featured very strongly with regard to infrastructure investment, making it a world class city. However, looking forward, the attention is firmly moving towards Sydney and South East Queensland, along with select areas of regional NSW.

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The long overdue stability of the NSW government and a huge injection from a few years of massive ‘stamp duty’ collections from the booming Sydney property market will fuel strong employment growth in select NSW markets providing stability, confidence and opportunity for investors with a keen eye for emerging markets.

South East Queensland also looks to be an exciting prospect, once the oversupplied areas, high-risk property types and poorly planned estates saturated with investor stock, are weeded out.

The Gold Coast will be a boom market that hits an impressive peak in 2018 with world wide focus on what I believe is a very strong market as they host the Commonwealth Games. Unfortunately, there will also be the usual Gold Coast ‘boom’ then ‘bust’ in some select property types (particularly high density developments), as oversupply issues hit investors hard.

As green shoots (such as a strengthening agricultural industry, increasing infrastructure spending creating more jobs, and the mining industry stabilizing) start to appear in the Australian economy over the next few years, watch for NSW, QLD and WA to lead the way, as this is where most of the nation’s future projects will be found.

Of course, this is not the lone driver or supply and demand in the property market. To hear more of what investors need to be aware of in the future, download my latest State Of The Nation Report now.

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