On top of the halving of interest rates and greatly increased access to housing finance, record increases in population have been a major driver of Australian housing demand — and home prices. Of course, big increases in population would be of little consequence for home prices if everyone lived spread out fairly evenly across our island continent. But we don’t.

Nearly two-thirds of us live in our eight capital cities, with the ongoing increase in Australia’s population – about 660 new residents per day – driving an ongoing increase in the demand for capital-city housing.

Over the past two decades, Australia’s population has increased from 16.1 million to 20.7 million. Most of these 4.6 million extra people – the biggest 20-year increase in Australia’s history, by a small margin – now live in our capital cities or somewhere else near the coast.

Just over two million of this increase in resident population – a bit less than half – came from offshore. That compares with net immigration of around 1.6 million in the 20-year periods to both 1966 and 1986.

Recent trends suggest 2006 will be the eighth straight year of net immigration in excess of 100k. The previous record run was four years, from 1986 to 1989.
Canberra over the past 20 years has run the biggest immigration programme in Australia’s history. Net immigration will exceed 100k in fully a dozen years in the two decades to 2006, having exceeded 100k in only a dozen years over the previous two centuries!

Simply, there are a lot more Australians these days competing to live on the same good bits of ground. As Australia’s population expanded and borrowing power increased, competition for the best spots to live naturally intensified and home prices increased accordingly.

The most expensive cities in the English-speaking world tend to be large, s-xy and coastal (think Los Angeles, NYC, Sydney), while the most affordable cities tend to be inland and less interesting (think Dallas-Fort Worth, Indianapolis, Louisville). Just take a look at Demographia‘s latest report.

It seems to me that if our politicians are keen to promote both a much bigger Australian population and affordable housing, then extra land release on the periphery of our (coastal) capitals is not going to be sufficient.

More attention may need to be paid to “decentralisation”, encouraging growth in business activity and jobs in areas well away from our major cities (and the coast, if we can drag ourselves away), where unremarkable undeveloped housing land is plentiful and cheap.

Releasing new housing land – “fixing the fringes” – to a large extent is about expanding our cities so they can accommodate Australia’s growing population, about “making room” for homebuyers who want a decent yard often even at the cost of long travel times. If the issue is improved affordability – before it puts any downward pressure on home prices on the periphery, let alone reduces the average price of Australia’s eight million existing homes – the rate of homebuilding on our urban fringes needs to be faster than the rate of growth in underlying demand.

If Canberra continues to boost Australia’s population with record levels of immigration (a million or so per decade), the pressure to expand the periphery of our capital cities will remain intense. Better transport and infrastructure will remain the key to allowing those living on our urban fringes access to the high-paying jobs and the educational and leisure opportunities our cities have to offer.

Unfortunately for aspiring FHBs (First Home Buyers), the areas on the periphery that suddenly benefit from improved access via better rail links or new freeways will see land prices jump and affordability fall.

Canberra isn’t inclined to reduce current high rates of immigration, despite the new arrivals – about 300 per day – competing against home-grown FHBs for housing, both rental and owner-occupied. That’s too bad for home-grown FHBs, because Canberra – both the Coalition and the Labor Party – judges there to be net benefits for the nation from ongoing high levels of immigration.

This is an edited extract from the 38 page draft discussion paper “Thinking About the Big Drop in Australian Housing Affordability” written by Macquarie Bank Interest-Rate Strategist Rory Robertson on 20 December.

Peter Fray

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