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Look Beyond Population Growth to Supply Side Criteria

Friday, May 24, 2013

Some advisers recommend the PIE buying formula – P.I.E. being Population growth, Infrastructure and investment, and Employment opportunity and diversity.  

The theory is that a location with those three elements at work will deliver real estate growth. As a method of reducing principles down to a digestible and easily-understood formula, it’s a reasonable approach.  

But some base their investment strategies on the P only. They believe that following population growth is the key to successful property buying. That is not only simplistic, it’s dangerous.  

I often receive emails from investors questioning why certain high population growth areas don’t feature is my hotspotting reports. They’re bemused because someone has advised them to buy in the population boom locations.  

They're making the mistake of looking at only one side of the equation - demand. The other side of that equation is supply - and that's where the problem lies.  

Developers invade the high-population-growth places - and often build too much new product. No matter how high the population growth rate, it won’t create capital growth if developers generate an over-supply.

That’s why many of Australia’s leading population growth areas have some of the worst-performing property markets. You could almost argue that rampant growth in resident numbers is a signal for property buyers to stay away.

The Gold Coast is the most obvious example. It has been a national leader on population growth for 20 or more years, but is a habitual under-achiever on capital growth thanks to over-building by developers. It is currently showing glimmers of recovery, after five dreadful years, but I would hesitate to recommend it to investors because we can be confident developers will do it all over again, as they have many times in the past.  

Five years ago I was interested in the Wyndham and Melton municipalities in Melbourne, because they had many of the growth-generating factors I look for in a hotspot. After initially delivering good real estate performance, they declined as developers moved in and over-supplied those markets with house-and-land packages.  

Today, both those locations have poor capital growth rates, well below city averages. Over-building has meant vacancy rates have been 6% or 7% or higher for much of the past three years (although more recently vacancies have come down to more acceptable levels in both Melton and Wyndham).  

The same syndrome is now impacting a couple of Queensland’s boom cities. Both Gladstone and Mackay have sharply rising vacancies, despite their myriad growth factors, because developers have overshot again.  

Both places have strong futures, thanks to their links to the resources sector and their expanding export facilities, but right now investors need to be cautious and selective.  

The overall message for investors is that they need to look beyond population growth and ask deeper questions – including questions about vacancy factors and the amount of new housing supply in planning.

 

Author: Terry Ryder  

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