Population growth as a whole can also play a part, and Australia is growing more rapidly than ever at present, with Australian Bureau of Statistics (ABS) figures showing the largest annual population increase ever in the year to March.

The population grew by an estimated 307,100 – an annual increase of 1.5%, putting the Australian population at around 20.9m. 54% of this increase – 162,600 people – came from net overseas migration.

But what knock-on effect – if any – will this have on capital growth?

Follow the migration flow

Rod Cornish, head of research, Macquarie Real Estate isn’t convinced that population growth as a whole is an indicator of possible capital growth, but he considers migration another matter entirely. In fact, he believes that the number of immigrants arriving in Australia from overseas has a significant impact on the market, particularly in the state capitals.

“Clearly migration patterns are very important for housing markets,” he says. “Right now we’ve got very strong migration and we’ve got low supply in most parts of Australia, so this is why we’re seeing demand improve and rental markets improve.”

Cornish focuses specifically on migration increases rather than population growth as a whole because the latter includes births, which don’t lead to demand for another household.

“When people shift here they need a house to live in straight away,” he says. “We’ve got very high overseas migration currently, the strongest since 1988. Skilled migration is the highest ever and then you think about where skilled migrations are moving to.

“They want to live in that inner ring of different capital cities around Australia, and that’s where the tightness in the rental markets is and that’s where rents are improving.”

Case in point

Queensland experienced the highest positive net interstate migration in the 12 months to March with a gain of 26,700 new residents, and Cornish looks to South East Queensland as further proof that high population growth and a booming property market go hand in hand.

In 2003, Queensland was getting migration of 67,700, says Cornish, and “where it did start to slow down in 2004-05 that market slowed down as well”.

He adds that, when migration was at its peak, Brisbane prices were at 43%, and in the following year they only went up 4% because migration had started to slow down. “Now we’re seeing migration into Queensland starting to improve a bit so we’re seeing underlying demand improve and prices improve,” Cornish explains.

The current market in Victoria also proves the link between migration and capital growth according to Cornish, who says that the current inflow of migration –the highest ever recorded – is the reason why Melbourne houses have been growing solidly for much of 2007.

Cornish adds that population can be overlooked as a factor in capital growth, how migration changes is also very important.

Income factor

Another indicator of capital growth which tends not to grab headlines is increases in average income.

Bernard Salt, analysed the 70 largest towns in Australia, looking at the average income of a person in 2001 and 2006. After comparing the two he discovered that the figure increased by 26% during this period.

“In Nambucca Heads it increased by 18% so the capacity to buy property is pretty soft and I would expect that to be transferred through into capital growth,” Salt explains. “However in Mackay it was 46% and that means that they have a greater capacity to increase their mortgages and to bid up the value of property.

“That to me is the better measure of capital growth. Where you have a sudden shift upwards in the average income it means that people have a greater capacity to buy property.”

The problem with strong population growth as a solitary indicator is that it’s often balanced out by new property being built to cater for the increased demand. Salt points to the likes of Penrith and Wyong in NSW as two prime examples, arguing that areas of strong population growth often have “extraordinarily high” levels of growth in supply, which prevent price tension from occurring.

“If you go to places like Penrith there’s a strong population growth but then everyone’s out there building houses to provide for that,” he says. “In an ideal world what you want is a place where there’s strong population growth and not the capacity for increased supply – that’s where you get price tension. A better measure is not population growth it’s income growth.”

Spotting the top-performers

Salt explains that ideally you want areas of strong population growth with limited capacity for new housing.

Coastal areas tend to be the safe bet where a fear of over-supply is concerned, as they’re one of the few regions where planning regulations and concern about environmental degradation prevent this from occurring.

Salt lists Byron Bay as a “classic example”, with strong population growth to the north and south at Tweed and at Ballina. “The market wants to go there, but because there are no new housing estates it has to bid up the property values of those places and that’s where you get your good strong capital growth,” he says.

Ripple effect

For investors who can’t afford the premium attached to the more desirable coastal regions, Salt advises that they watch the market carefully, and bide their time.

Once an area of strong population becomes full, with demand struggling to cater for the supply, then its neighbouring suburbs will often benefit from the resulting ripple effect – and investors in the original suburb will be laughing.

Salt lists the City of Knox in Melbourne as an example, saying it was “the fastest growing part of Victoria in the 1980s – you wouldn’t have got strong capital growth then when so many people were buying first homes there.

“But as soon as the focus shifted to Cranbourne, Knox became full up; there was no more supply and values started to increase as a consequence.”

The bigger picture

Monique Wakelin, director, Wakelin Property Advisory, believes that we need to look at the bigger picture, arguing that no single factor can be seen as an indicator of capital growth.

“It’s too simplistic to make a statement that population growth or growth in annual average incomes per se are indicators for capital growth,” she says. “It’s more the stability of the population and the ratio of supply.”

Wakelin says that the population must first be high, stable and growing to begin with, adding that if population growth is coming off a very low base it isn’t necessarily an indicator for growth at all.

In these instances, the resulting pressure to provide more housing and infrastructure to account for population growth isn’t ideal, and capital growth is by no means a given.

“All that means is that you’ve got a developing area where there is constraint as far as supply and demand as far as housing is concerned,” says Wakelin. “That’s very different to areas where there isn’t any available land.”

Desirable central suburbs such as Dover Heights in Sydney’s east and Mosman, on the Lower North Shore, provide a clear comparison, with developers, tenants and buyers equally desperate for a way in to the market.

In suburbs such as these, where there’s an established population that has a growth bias to it, the pressure of that growing population in turn puts pressure on property prices

“Lots and lots of people want to move to those areas,” says Wakelin. “The population may be stable but if the population could grow – if there was enough property to go round – it would grow.”

But as the supply is finite, and will continue to be so unless there are significant changes to the planning laws, there are clear restraints as to what can be done.

“There is population pressure as opposed to population growth and a finite supply of property where all the available land is accounted for,” says Wakelin. “That’s what produces capital growth, not population growth per se.”

Supply and demand

Wakelin agrees that the correct balance between supply and demand is key to future capital growth. “You can have lots of people flooding in to a growth corridor and you can have so many subdivisions opening up and so much construction going on but the supply is still in excess of the demand even if the demand is rocketing,” she says.

As for migration, well this is not a straightforward sign of growth, according to Wakelin, because it depends on property values moving uniformly across the country – “and we know they don’t”.

With each locality housing different demographics and reacting to different variables at different times, the overall marketplace of each region must be analysed independently.

“You have to look at where these migrants are actually going and which sector of the market they are going into and then you can talk about that sector of the market – but you can’t talk about it as a general whole,” says Wakelin.

“Population growth is only one part of the picture. The most obvious sign of capital growth is where you have an area where demand for property consistently, over the long term, outstrips the available supply. That’s the essence of it. What becomes complicated is what actually drives demand. Then you’re into something different.”

So while population growth alone may not stand up as a clear indicator of capital growth, population loss is a sure sign of a market in crisis according to Salt.

“Population loss actually decreases property values,” he says. “If you have a look at the wheat belt in Australia, all these rural towns that are losing people, what it means is that everybody’s putting their property on the market, no one’s coming in to buy them.

“Logically if population loss has a decreasing impact on property values, population growth should have a positive impact. But you want that positive population growth to be managed in a very particular way if you want to achieve the very best results.”