Immigrant Exodus — The Clock is Ticking for the Aussie Property Market
Today we continue with Part 2 in the series on factors effecting housing prices, with a brief analysis of the effect of immigration. Part 1 on the impact of Unemployment can be viewed here.
Disclaimer: This is not financial advice, nor does it take into account your individual circumstances
In the years since the Global Financial Crisis (GFC), one of the key narratives put forward in favour of sustained strong growth in housing prices, has been continued high levels of immigration.
It is a simple yet compelling narrative based on basic supply and demand, something that anyone and everyone is capable of understanding, unlike some of the more complex drivers of housing price growth.
While it is highly debated how much immigration may or may not contribute to housing price growth purely based of its net effect on supply and demand, the boost it provides to the market in terms of sentiment and psychology cannot be understated.
The narrative can be boiled down to a single sentence.
There are a finite number of homes and with an ever-growing number of migrants coming in from overseas every year to buy them, prices will continue to rise.
But what if people did stop coming? What if one of the strongest psychological drivers of housing price growth was not only reduced, but suddenly thrown into reverse?
While this would be primarily driven by the cancellation of international travel due to Covid-19 and the likely ongoing poor economic outcomes for migrants and future hopefuls, there is historical precedent for immigration being reduced due to high unemployment and recession.
Immigration Has Been Slashed Due to Recession Before
In 1988 net overseas migration reached 172,900 people, as the economy boomed growing at more than 2.2x the rate it was in 2019 before Covid-19 hit.
However, when the economy slowed and recession arrived, under the Hawke/Keating government’s the rate of immigration plummeted. Consistently dropping every year until finally in 1993, just 34,900 new net migrants arrived on our shores.
With unemployment peaking at over 11% the Keating government saw the writing on the wall, running a mass migration program with unemployment still so high due to the recent recession was a mistake.
Despite the calls for the status quo high levels of immigration to continue once the international travel resumes in the present, there is a clear historical precedent for net immigration to be slashed by up to 80% in order to protect outcomes for unemployed workers and struggling households.
Temporary Visa Holder Exodus
Its no secret that in recent years one of the key drivers of headline GDP growth has been driven by the arrival of temporary visa holders, particularly international students.
Between December 2011 and December 2019, the total number of temporary visa holders increased by 47.7%, adding more than 786,000 people to our shores at any given time.
However, as a result of Covid-19 more than 300,000 temporary visa holders have already left the country, with an additional 300,000 expected to leave by years end, according to Abul Rizvi a former senior Immigration Department official.
Whether the exodus continues beyond the end of the year or begins to include a larger number of demographics key to housing prices such as New Zealand citizens living in Australia remains to be seen. None the less, the impact on the balance of housing supply, particularly in time when buyers/renters may be reticent to commit could be very significant.
The Reality of the Situation in Numbers
With a median Australian household size of 2.6 people per residence, a reduction in temporary visa holders of an estimated 600,000 by years end could free up over 230,000 homes.
While data on the exact structure of temporary visa holder households remains relatively unknown, adding anything in the ballpark of 230,000 homes to the rental or sales market may place significant further downward pressure on both rents and property prices.
Based on the 2019 net immigration statistics from the ABS, a rough estimate in the reduction in net overseas migration for the year could be as many as 180,000 people. That could be over 69,000 homes that may no longer be required before the end of the year.
While Immigration Stops, Construction Continues
In 2019, 203,063 new dwellings were completed. In the same time the natural increase to Australia’s population (population growth excluding immigration) was 139,100.
Based on an extremely rough calculation excluding immigration, Australia built over 149,000 more homes than it needed during 2019.
With immigration at a standstill for the immediately foreseeable future, this growing supply of homes relative to demand may also play a significant role in determining the market’s equilibrium.
Turnover and the Impact on Housing Prices
As all these factors combine to create an oversupply of property potentially well over 300,000 homes, its possible the relative lack of demand from renters and buyers may have a significant impact on the market on a shorter timeline than many expect.
Given the historically low turnover within the market, with approximately 500,000 homes being transacted on in any given year. The growing supply of homes provided by the exodus of temporary migrants, coupled with the removal of demand from new permanent arrivals could easily see the equilibrium of the property market flipped on its head.
Conclusions
The effective reversal in immigration joins rising unemployment as yet another major headwind for the property market in the months and perhaps even the years ahead.
As it stands the Morrison government is projecting net overseas migration for the 2020–2021 financial year will be down by 85% when compared with 2019. But whether or not this cut ends up coming to pass remain unclear.
In the long run if cuts to immigration are forced upon the government in the same way they were by 11% unemployment in the 1990’s and the number of temporary visa holders continues to decline, a scenario is possible in which Australia ends up with enough housing supply to provide for the nation for at least 5 years.
Ultimately, in the long term truly predicting how this factor will play out in reality and its effect on the property market is filled with unknowns.
But one thing is certain, for the immediately foreseeable future, a large oversupply of property will ensure that immigration, once the property market’s greatest strength will become one of its greatest weaknesses.
