Monday, March 29, 2010

Australia's Population Growth Driven Housing Boom

I have frequently discussed how growth in the Australian economy is driven by rising commodity prices. There is however another factor driving growth, namely high population growth.

Australia's population grew by 2.1% in the year ending September 2009, a lot higher than in most other advanced economies (typically population growth is less than 1%, and even negative in for example Germany and Japan). This has a particularly positive effect on the housing sector, which continues its long boom, despite high prices and interest rates that are higher than in most other countries.

As this article points out, the rapid population growth has contributed to a housing shortage, something which implies that both construction activity and house prices will continue to increase.

More rate hikes by the Reserve Bank of Australia will have a cooling effect, but as long as population growth remains high, the Australian housing sector will likely remain strong, or it will at the very least not see a significant crash, as a growing population implies growing demand for housing.

However, this doesn't mean that Australian housing will necessarily boom forever. Ireland and Spain both had high immigration driven population growth during the peaks of their housing booms, but when their economies started to cool, the flow of migrants turned, and they were left with a huge surplus of housing, a huge debt burden and many unemployed construction workers. If the Australian economy weakens because of renewed declines in commodity prices, this could happen to Australia too.