Housing Demand for residential property has remained strong over many decades.
But what’s driving this resilience in today’s climate?
Key demographic demand factors:
- A key driver of this housing demand resilience is population growth. Australia’s population growth is high by international standards, but this does not tell the whole story alone.
- The composition of Australia’s population growth lends itself to stronger demand for housing because it includes a high proportion of working age adults (arriving as permanent migrants and long-term residents) who immediately add to demand for housing.
- The average size of households (number of people per household) is in long-term decline in Australia and took a sharp plunge lower during the COVID-19 disruptions. This trend reflects a number of underlying causes and adds significantly to demand for housing because more homes are required to meet the needs of the same population size. Some reversal may occur over coming years (i.e. larger household groups) but this long-term dynamic will remain.
- Demographic differences across states help to explain state differences in housing demand. In particular, migration patterns help to explain why property transaction volumes are often higher in Queensland than in NSW and Vic, despite its smaller total population size.
Interest rate cycles, credit availability, land supply shortages, construction delays and other factors often contribute to short-term and localised fluctuations in the number of homes that people are able to buy in practice, but the long-term or ‘underlying’ direction of demand in the Australian property market always seems to be upward.
The presence of this sustained demand means that property markets are likely to remain tight, even if mortgage rates rise higher and supply constraints ease.
The demographic trends below help to explain the long-term drivers of this demand.
1. Underlying demand for more homes will keep rising due to strong population growth
In property markets, it is often said that ‘demography is destiny’ . In Australia’s case, recent research by PEXA and Longview confirms that demographics – and especially our persistently strong population growth – is a primary driver of ongoing demand for housing, growing cities and rising prices over the long-term. Strong population growth is a defining feature of Australia’s economy and communities. It is stronger than other advanced economies with a similar historical reliance on net migration (for example, USA, Canada and New Zealand) but is in contrast to other comparable economies that have weak population growth (for example, the UK and much of the EU) or population decline (for example, Japan and South Korea).
However, the causal link between population and housing is not straightforward. Over the decade to 2022, Australia added between 150,000 and 200,000 dwellings per year to our national housing stock (an average annual growth rate of 1.7%), taking the total number of dwellings from 9 million in 2012 to 10.9 million by Dec 2022 . This growth in dwelling numbers has been stronger than population growth in all years since 2014, and stronger on average over the whole decade. Annual growth in the resident population averaged 1.4% over the decade to 2022, or 1.6% if we exclude the COVID-19 years of zero population growth (chart 1).
Housing price growth has been comparatively even stronger strong over this period, even though the growth in housing stock (supply) appears to have been keeping up with population growth (demand) or even running slightly ahead of it, at a national aggregate level. The mean price of dwellings rose from $488,000 nationally in 2012 to an all-time peak of $961,000 in September 2022.
In the current climate of widespread housing shortages and high prices, this apparent gap between dwelling growth (supply) and population growth (demand) may seem puzzling. This is because the devil is in the detail. These details help to explain the strength of this fundamental driver of housing demand.
Chart 1: Number of dwellings and estimated resident population, annual growth, 2012 to 2022
Source: ABS 6432.0, Total value of dwellings (Dec 2022); ABS 3101.0, National, state and territory population (Sep 2022)
2. Strong (working-age) adult population growth adds immediately to demand for homes
Australia’s population growth comes from a mix of natural increase (births less deaths) and net overseas migration (permanent and long-term arrivals less departures), with net migration accounting for the majority of growth in all years except 2020 and 2021, when COVID-19 disruptions caused a net outflow of people, for the first time in 100 years (chart 2).
The high proportion of population growth that comes from net migration means that more of our growth includes working-age adults than it would if the same numbers came from natural increases. This means that growth in the adult population (defined as 15+ years) is persistently higher than total population growth (chart 3) and closer to the growth rate in dwelling stock. The Australian Government’s Centre for Population expects this gap between adult population growth and total population growth to widen in coming years, despite a projected slowing in total population growth. The Centre expects our population will continue to age, the birthrate will fall and a growing share of our growth will be derived from net migration. These trends will provide a further boost to demand for housing, as the adult population grows and ages.
Chart 2: Estimated resident population growth by source of growth, actual and projected, 2016 to 2032 and Chart 3: Estimated resident population and adult population, annual growth, 2012 to 2032
Chart 2: Estimated resident population growth by source of growth, actual and projected, 2016 to 2032. Data source: Centre for Population, Population Statement 2022, Jan 2023.
3. Long-term decline in household size adds significantly to housing demand
The third demographic detail that explains Australia’s unusually strong demand for housing is changes in household size (number of people per habited dwelling). Estimates of average household size from the census and the ABS monthly labour force surveys indicate a long-term decline in the number of people per dwelling across Australia, with single-person and couple-only households becoming more common (chart 4) . This trend is related to our ageing population but also reflects long-term gains in wealth, incomes and living standards. It has continued despite persistent pockets of chronic over-crowding in disadvantaged communities, which reflect an unequal distribution of access to housing. This decline in household size has resulted in significant additional demand for housing, over and above the population growth rate, over an extended period of time (chart 5).
This trend toward smaller households was ‘turbo-charged’ during the COVID-19 disruptions in 2020 and 2021, as more people sought larger, less crowded homes, often in regional and outer suburban locations. ABS data indicate a range of contributing trends during this period, including higher family separation rates, fewer share-houses, fewer international students and fewer backpackers (who have higher rates of communal living). The RBA estimates that this change in household size alone contributed 120,000 additional households to housing demand in 2021, despite negligible population growth in that year. This effect was large enough to compensate almost entirely for Australia’s ‘missing’ households due to zero net migration.
The return of international students, backpackers and inner-urban living will see household size recover a touch more from here. We may also see some ‘involuntary’ increases in home-sharing, in response to high interest rates, house prices and living costs (for example, young people sharing with each other or their parents for cost reasons).
Chart 4: Average household size* and Chart 5: Annual household formation rate, by contribution
Chart 4. Average household size (average number of people usually resident in each occupied private dwelling). Source: ABS census and RBA calculations from ABS labour force survey microdata.
4. Demographics and migration help to explain differences in housing demand across states
Australia’s states and territories tend to exhibit different characteristics in their property markets, with different levels of pricing, transaction volumes and growth rates. Some of these differences reflect key demographic differences and/or differences in migration patterns. In our largest states, international migration has traditionally flowed into Sydney and Melbourne first, before dispersing more widely through later inter-state migration flows.
This pattern has been shifting of late however, with more international arrivals heading directly to Brisbane instead of the southern states. This comes on top of large interstate migration flows into Queensland from Victoria and especially NSW, which are helping to push Queensland’s total population rate above other states (chart 6). These higher levels of movement into (and out of) Queensland – and a faster population growth rate – are contributing to higher local housing demand and to property turnover rates in Queensland at present, even though the total population of QLD remains lower than VIC or NSW (charts 7 and 8).
Chart 6: Population growth, by state (left) and Interstate migration flows (right), Chart 7: property settlement volumes, by state, 2020-2022 and Chart 8: refinancing activity volumes, by state (index), 2019-2023
Chart 6: Population growth, by state (left) and Interstate migration flows (right). Data source: Centre for Population, Population Statement 2022, Jan 2023