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Population growth is adding to hot property markets in Australian cities

Population growth is not only the key to Australia’s economic growth and output, but it also plays a central role in housing demand and price growth, according to the analysis from international real estate firm Knight Frank.

In Sydney population trends have been a lead indicator towards house price growth. Despite easing over the past 12 months, overseas migrants have underpinned Australia’s recent population growth, accounting for approximately 58% of population gains over the past five years.

The importance of overseas migration has become more apparent over the past decade as Australia’s immigration policies have been geared to meet the needs of the Australian labour market, with temporary visa programmes, predominately working holiday and temporary 457 visas, accounting for over half of all overseas visas issued in recent years.

The report also points out that subsequently, population growth over the past decade has been a reflection of a pick-up in temporary migration as opposed to permanent migration.

While recent population statistics published by the Australian Bureau of Statistics shows that population growth nationally has eased from its recent peak in 2009, to average 1.5% over the 12 months to September 2014, the report says that what is more of note is the rate of population growth by city.

Indeed, despite remaining high by historical standards, population growth in the dominant resource capital cities of Brisbane and Perth has fallen sharply, particularly Perth were the annual rate fell from 3.6% to 2.5% in just 12 months in the year to June 2014.

It also points out that the drop in population growth in Perth is now beginning to filter through to its property market, where over the six months to March 2015, house prices and sales volumes have dropped 2.6% and 2.8% respectively.

On the other hand, population growth in Sydney and Melbourne increased over the 12 months to June 2014, supported by stronger economic prospects, underpinned by residential construction. The stronger economic environment within these cities led to an improvement in Net Interstate Migration, particularly to Melbourne and the state of Victoria, as people sought employment opportunities outside of their home state.

The pick-up in population growth has been met with solid house price gains in these cities, where over the six months to March 2015, house prices in Sydney and Melbourne are up 8.2% and 2.8% respectively.

Nationally, the recent easing of population growth can be partly attributed to the improving New Zealand economy. Australia has enjoyed strong population growth from New Zealand citizens for subclass 444 visa holders over the past five years as weak economic conditions in New Zealand provided the impetus to move to Australia.

However over the past 12 months, the New Zealand economy has shown solid signs of improvement, with the unemployment rate now lower than Australia at 5.8% compared with 6.2% for Australia. Consequently, New Zealand citizens are returning home, while fewer are coming to Australia.

Not all is bad news however, the report says, with a pick-up in Asian migrants partly offsetting this reduction. Inward temporary movements from China and India have represented the bulk of this uplift, many of which are on student visa programmes.

Looking ahead, both population and house price growth favours Sydney and Melbourne, with the lion’s share of overseas migrants expected to gravitate towards these ‘gateway’ cities.

Alternatively, fewer migrants on temporary skilled subclass 457 visas will head to resource capital cities of Brisbane and Perth given more limited employment opportunities as resource projects enter their less labour intensive operational phase. Ultimately, this is likely to constrain population and house price growth in each of these cities.