The biggest myth of what drives property prices.

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      AvatarPK Gupta
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      For decades property investors have been taught that population growth is the most important driver of capital growth. BUT, not only is population growth the most overrated indicator of capital growth, but it can be an indicator of negative capital growth.

      The problem is perpetuated by many property investment advisors, educators and so-called experts. Taking the easy way out, they incorrectly interpret property data, passing on their misunderstanding to investors.

      Economists and statisticians have published aggregate data apparently showing a close correlation between population growth and capital growth. New investors have latched onto this in an attempt to purchase high growth investments.

      The theory is solid: Assume a fixed number of properties and a growing number of people who need a property. The increased demand for a limited supply equates to price rises.

      Investors want to know of locations in which demand exceeds supply because then prices will rise. But can investors use population growth data to identify locations where demand exceeds supply?

      The core problem problem is in the application of population data. Here are the issues:

      – The data is a lag indicator, so once you know it, it’t too late
      – The sampling of the data is too infrequent
      – The data is inaccurate for small geographies
      – The supply side is ignored

      Most importantly, population growth is almost everywhere in Australia! So will property price growth everywhere? No.

      The relativities of population growth across regions need to be understood in context with supply.

      More on this next time!

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