The mainstream media might make out that property prices are a simple cycle that economics expert can predict with ease – but the reality is that it’s a lot more complicated than that.
There are in fact several things that drive our property markets, and some of them might surprise you.
1. Jobs, jobs, jobs
The availability of employment is inextricably linked to the property market, because without a job it’s pretty difficult to pay a mortgage.
Mining towns in Western Australia, and to a lesser extent in Perth, are the perfect example.
When there were loads of high-paying jobs available, house prices and rents went through the roof. As the boom came off the boil, so too did the housing market.
This also explains why Sydney and Melbourne have been our strongest markets historically, as these cities are where the headquarters of banks, media outlets and other corporate giants are located.
Affordability pushes up house values meaning that people with higher paying jobs can afford to buy new homes or upgrade their home and areas where wages growth is higher than average experience capital growth that is higher than average. So that's where you should be looking.
2. Amenities and Infrastructure
Another contributing factor is infrastructure.
Roads, public transport, schools and hospitals are all essential services, and where they are lacking the housing market tends to reflect this. Infrastructure projects also create jobs, which we’ve already touched on.
And don’t forget things like community centres, places of worship, parks and green corridors.
These all influence the demographics of an area, and as I’ll explain below, demography is an important factor in itself.
In addition to non-negotiables like transport and education, amenities such as shopping centres and restaurants make an area more desirable and attract different types of buyers and renters.
Suburbs that have thriving retail precincts, award-winning cafes and bespoke cinemas yield better price growth than those whose biggest attraction is a McDonalds or supermarket.
3. Population growth
Population growth plays an enormous role in housing prices. It’s the basic economics of supply and demand.
If there are more people competing for something, and limited stock, prices will rise.
When there are more properties on the market than buyers, prices take a dive – just look at the issues with apartment oversupply in some of our cities. Populations may swell due to immigration or an increase in the birth rate, and this is probably the biggest driver of property values in Australia.
The demographic profile of a suburb is another key factor in driving not only property prices, but also development and the composition of the housing stock.
Younger people, university students and Asian migrants prefer to live in apartments, while families still covet the quarter-acre block in the suburbs.
Some suburbs have more homeowners than renters, while others are majority investment-owned. Household income and size is important too.
All these factors impact desirability and competition, and in turn, property values. But remember, demographics aren’t set in stone and communities are constantly evolving.
Gentrification is one phenomenon that is transforming suburbs around the country from downtrodden working-class dives into hipster hotspots – West Footscray in Melbourne is a great example of this.
5. Shiny, new housing
While population growth, demographics and jobs drive higher demand for housing in certain areas, there are also factors which stimulate the building on new homes.
It could be that demand for big blocks has decreased, and buyers are not keen to renovate older homes, prompting developers to knock down post-war three-bedders and build four townhouses on the site.
Or perhaps a new university campus nearby means a block of one- and two-bedroom apartments makes more sense.
Oversupply can be a problem here, but this issue tends to be confined to the inner suburbs of our big cities, rather than sprawling new estates in outlying areas.
Don’t forget that developments can impact prices in neighbouring suburbs, too.
Faced with the choice of a renovator’s dream in one suburb or a brand new house and land package just five minutes up the road, buyers can become less willing to part with their cash for the fixer-upper.
These are just some of the factors that can impact housing prices; being aware about shifts in the economy and these evolving external influences can help ensure you remain an educated investor, who doesn’t get swept away in alarming media headlines.
Brett Warren is a director of Metropole Properties in Brisbane and uses his 18 plus years property investment experience and economics education to advise clients how to build their portfolios.
He is a regular commentator for Michael Yardney's Property Update.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.