I came across this chart on X recently, comparing house price growth with money supply over the past decade in the USA.
The idea is: when there’s more money circulating in the economy, it can push property prices higher because housing stock is relatively fixed. In short, supply of houses simply can’t keep up with the growth in money.
Of course, correlation isn’t always causation, and property prices are influenced by many factors. Still, I was interested to explore if there’s a correlation between money supply (I used a different measure than in this chart) and property prices in Australia and if investors could use this data. Let’s look at the data.
Sydney
The chart below tracks Sydney median house price, NSW population growth, and NSW lending volumes since mid-2002. The loan volume data only begins in mid-2002, which is why my analysis starts there.
What stands out is the very direct positive correlation between lending volumes and house prices, while the link with population growth appears weaker. For example, population growth rose strongly between mid-2006 and the end of 2008, yet property prices barely moved, even though housing supply remained relatively flat. Between late 2008 and mid-2011, population growth slowed, but house prices still rose. Of course, these are relatively short periods of time.
In theory, strong population growth should support property price growth because a rise in population can often outpace the economy’s ability to build new dwellings. This data, however, suggests there may be a lag between population changes and their impact on prices. This thesis also ignores that there are many other factors that influence property prices.
A noticeable trend in this analysis for all states is the disruption caused by the Covid period – a once-off event that skewed the usual patterns. Interest rates were cut to historic lows, driving a surge in borrowing and, in turn, property prices, even though population growth slowed due to pauses in overseas immigration and unusual volumes of interstate migration. It is probably best to ignore this period in this analysis.
Melbourne
Melbourne’s property market data shows a strong link between lending volumes and population growth up until the onset of Covid. Notably, Victoria’s population growth began declining in mid-2016, helping explain the state’s decade of underperformance, as illustrated in this table previously. Sentiment has always been negative over this period.
More recently, population growth has averaged 39,000 people per quarter over the past 2.5 years. This is above the previous peak of around 35,000 per quarter in 2015–2016, driven largely by overseas immigration. It is worth noting that Victoria has the highest population growth in absolute terms.
Lending volumes have also risen since mid-2023, primarily from owner-occupiers. Whilst property prices have only grown modestly in 2025 so far, this data could suggest that growth may accelerate in the future.
Brisbane
Brisbane’s data tells a different story compared to other states. For most of the review period, Queensland’s population growth was relatively steady, averaging around 21,500 people per quarter. Since mid-2022, however, growth has accelerated to roughly 30,000 per quarter, driven by stronger interstate and overseas migration. Therefore, like what we saw in Sydney’s data, lending volumes appear to have a stronger correlation with property price growth than population alone.
Perth
Perth’s data again highlights a stronger link between lending volumes and property prices than with population growth. For example, population growth fell sharply between 2012 and 2016, yet rising lending volumes supported property prices. Prices only began to decline once lending volumes declined at the end of 2015, suggesting money supply was the key driver during this period.
Adelaide
Adelaide follows the same pattern. Between 2016 and 2020, population growth accelerated, but lending volumes edged lower. As a result, property price growth over this period was relatively modest, reinforcing the idea that lending activity has a stronger influence on property prices than population growth alone.
Investors or owner-occupiers?
Around 26–28% of property buyers purchase without a mortgage, so looking at lending volumes alone does not capture the whole market. That said, the proportion of ‘all-cash’ buyers tends to be relatively stable, which means lending volumes remain a reasonably reliable indicator of overall market activity and investor participation.
Historically, the borrowing market has consisted of roughly 35% investors and 65% owner-occupiers – what we should consider “normal”. Loan growth is sustainable when it reflects this mix; markets driven predominantly by investors can signal speculation rather than healthy demand. That said, it is not unusual for investor activity to be higher during a growth cycle.
As the table below shows, investor activity is above average in most markets, with Victoria as the notable exception. Relative to long-term trends, participation is particularly strong in South Australia, NSW, and Western Australia. It’s reasonable to expect that investor volumes may moderate in these markets as prices rise and the economics become relatively less attractive to investors.
What drives lending volumes?
I consider lending volumes to be one of the most useful measures of property market activity, because demand is influenced by multiple factors. Population growth is commonly cited as a main driver, but the truth is it’s only one of many factors. And looking at population growth alone is of limited value unless you also consider housing supply, density, and demographics, as these determine whether there is enough housing to meet demand. The consensus is that we currently do not have enough dwellings to satisfy our growing population, and I don’t disagree with this conclusion – historically low rental vacancy rates reflect this fact.
Lending volumes are influenced by several key factors:
- Property and consumer sentiment: Sentiment probably has the biggest impact on borrowing. Periods of uncertainty, whether political, economic, or geopolitical (think wars, and Trump), tend to reduce borrowing demand.
- Economic health: High employment and strong economic growth increase borrowing demand. The unemployment rate is a particularly important measure; Australia’s current 4.2% rate reflects a balanced labour market.
- Population: A larger population increases the pool of potential borrowers, naturally lifting loan volumes.
- Capital improvements: Property prices are influenced by two main factors: the value of the land itself, which depends on supply and demand, and any capital improvements, such as renovations or a complete rebuild.
State lending volumes can also be impacted by macro-settings. Whilst these settings are the same across all states, they can impact states differently depending on the above forementioned factors:
- Credit standards and lending appetite: Changes in lending rules can significantly impact how much and how easily people can borrow. For example, the regulatory loan buffer is currently 3% above the loan rate (so, around 8.5–9% p.a.), compared to 2% prior to December 2014. Individual banks can also adjust their lending appetite, especially for investors, based on their risk strategies.
- Interest rates: The cost of borrowing directly affects demand. Lower mortgage rates reduce the “price” of borrowing, generally increasing loan demand, all else being equal.
Forget population – look at lending volumes
Regarding future property price movements, population growth matters, but I would argue that it is ultimately reflected in lending volumes. For that reason, I consider lending volumes as the most reliable short-term indicator of property price movements. As I have discussed in previous blogs, timing is important: investing just before a growth cycle begins and avoiding markets that are at or near the end of a cycle is key. This strategy depends on returns reverting to their long-term mean, which I covered in detail in this blog recently.
Looking at the data above, Perth and Melbourne appear the most attractive. Melbourne may even have the edge, given that investor activity is lower than usual, although Melbourne based buyer’s agents report that over 70% of new clients are interstate investors, but this hasn’t fully reflected in the data… yet. This mirrors what happened in Perth in 2023, where interstate demand initially drove the market into its current growth cycle.
