Will Property Prices Go Up Forever?

When your property price appreciates, it is not really your house that has gone up in value. The cost to construct your house in Petaling Jaya or KLCC is actually the same. In fact, if it was your house that is being valued, its value would depreciate over time as it becomes older.

What goes up is land price. Not house price.

What really goes up in value is land price. Land is scarce. It is not something we can produce. Yes, land reclamation allows the expansion of coastlines but it requires a lot of sand and that resource is limited too.


Not being able to produce more land in the wake of a global population explosion means demand overshadows supply. Therefore land prices will always rise.


Will it ever stop rising?


Why Property Prices Rise


Before answering that question, we need to look at why property prices go up. Appreciation in land value can be attributed to one, and only one primary factor - Supply and Demand.


Everything else I believe fall under this broad factor.


There are plenty of sub-factors like;

  • wages,

  • inflation,

  • interest rates,

  • ease of acquiring credit, and

  • speculation,

which all influence demand or supply.


So as long as you have a situation where demand is increasing and supply of land is pretty much static, you will find that prices rise. When demand decreases, price will stop rising and then fall as demand continues its downward trend.


So, one can assumed that as long as the human population grows, demand for housing will rise and with it, prices. And that brings us to a billion dollar question...


Will World Population Decline?


Technically if the human population grows at its current rate, there will be no more space left on earth to accommodate all if us. This only means that the price of land will keep rising.


Interestingly, I have always wondered what would happen when the human population has outgrown earth. Would we colonise other planets? How would this affect property prices?


Well it turns out that we may never have to colonise other planets. Kurzgesagt's video, Overpopulation – The Human Explosion Explained, gives a factual account on why this is so. The video explains that human population growth goes through 4 phases.


It starts with high birth rates and high fluctuating death rates and ends with low birth and death rates. In the final phase, population growth is negligible or declines. All countries without exception go through these 4 phases. Therefore, population growth will hit a plateau and may decline after that. According to the UN's estimates, the 12th billion person will never be born.


All the studies I have read point to this; populations all over the world will decrease. This trend according to George Friedman, an expert on geopolitics, is irreversible.


To quote Agent Smith in the Matrix, "You hear that Mr. Anderson? That is the sound of inevitability."


What Is Driving This Phenomenon?


The primary driving force is urbanisation.


George Friedman offers a simple explanation. In regions that are agrarian or have low-level industries, children are a source of wealth. The more children you have, the more labor available to you to farm and produce. Children start helping their families at an early age to generate income. So it pays to have more children.


In modern industrialised societies, children are heavy consumers. Raising and educating children in these societies entail very high costs. It naturally follows that people opt for less children here.


For a population to grow, the number of birth rates must exceed 2.1. Most European countries and Japan now have birthrates below this threshold. Even poorer economies like Bangladesh are forecasted to have birthrates below 2.1 by 2050 at the latest.


What Happens When Populations Decline?


We will see a complete paradigm shift as the global population declines. Whether it is catastrophic in the beginning or not is not clear. What we do know is the economy as we know it will change.


A declining population leaves in its wake significantly higher aged people. Until this reaches a balance, younger people will carry the burden of supporting an aged population. This is because less productive labor exists in the economy in relation to the population size.


One of the most important shifts will be in the value of labor. Historically and today, between labor and capital, the latter is more expensive. However, as the availability of labor reduces through population decline, labor will become more expensive than capital. This would cause a shift in the distribution of wealth.


The 3rd factor of production; land, will also go through declining value.


A study conducted by Yuki Saita from the Research and Statistics Department, Bank of Japan and Hitotsubashi University, found an inverse relationship between old age dependancy ratio and real estate prices in both the US and Japan.


This suggests that property prices will decline as populations decline.


Therefore, property prices may not continue to rise forever. How far away are we from a reversal in the population growth? According to UN estimates, we have until 2100. Other experts believe it could happen as early as 2060.


That gives you a good 40 to 80 years to reap significant rewards from the property market. Because as of today, it is still one of the best investment classes available.


If you want to see significant capital returns in less than 10 years, check-out Kiara 163, a gem in Mont Kiara that we're totally for (full disclosure; we're marketing this property and get a commission from its sale if you buy it through us).

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