The housing market is under the spotlight, with overseas migration being identified as a significant influence. Despite challenges like high interest rates, low consumer sentiment, and strained housing affordability, property values and rents are on an upward trajectory, while vacancy rates are declining amidst record-high net overseas migration.
National home values have surged by 7.2% year-to-date, and rents have seen a 6.0% increase in the same period. While heated discussions about migration’s impact on housing affordability intensify, we do need to consider various factors influencing values and the rental market. Long-term migration policies should not be swayed by short-term volatility in migration and property markets.
According to CoreLogic, here are some insights into migration and the housing market.
Short-Term Rentals Dominate Migrant Housing Tenure
The immediate effects of changes in overseas migration are predominantly felt in the rental market rather than in property purchases. Permanent migrant settlement data from the Australian Bureau of Statistics (ABS) indicates that, in the five years leading up to 2021, almost 61% of migrant arrivals opted for rental accommodations. Notably, the homeownership rate was higher among permanent migrants with extended residency, encompassing 55.6% of arrivals between 2012 and 2016 and 70.6% of those who arrived before 2012.
Heightened Migration: A Result of Temporary Restrictions
The surge in migration can be attributed, in part, to temporary restrictions that Australia imposed on its borders in late March 2020. By March 2023, Australia’s annual population growth reached an impressive 2.17%, marking the highest rate since 2008. Net overseas migration, calculated as overseas arrivals minus departures, currently stands at a record annual high of 454,000 individuals added to the population over the past 12 months.
For context, the pre-COVID decade’s average for annual net overseas migration was 217,000. Assuming an average household size of 2.49 people per dwelling in January of the current year, the period from January to March would have necessitated around 182,000 additional dwellings despite approximately 175,000 dwellings being completed. This demand is further amplified by new household formations within the country, driven by factors such as young Australians moving out, purchasing their first homes, and starting their own families, as well as a rise in divorce and separation rates.
This increase in net overseas migration is propelled by a concentrated influx of overseas arrivals in a condensed timeframe. While the record-breaking number of arrivals may, in part, be attributed to new and deferred decisions to relocate to Australia converging, historical migration patterns indicate that, without the travel ban, net overseas migration would likely align more closely with historical averages for the year leading up to March 2023. It is noteworthy, however, that there have still been fewer arrivals post-COVID compared to what would have been without travel restrictions. This year’s substantial migration spike, Anticipated to stabilise over time, should not significantly influence long-term migration policies.
Impact of COVID Migration Ban on Rental Market Dynamics
While a temporary migration cap may initially alleviate housing demand, the COVID-19 pandemic has highlighted the enduring challenges associated with such measures. The reopening of international borders triggered a demand shock in the housing market. This resulted in a rapid rent increase and exacerbated an already tight rental market. Compounding this situation were constraints on new supply, as sellers hesitated due to rising interest rates, and the completion of new homes faced delays due to increased material costs and labour shortages.
Interestingly, some markets heavily exposed to overseas migration witnessed a sharp decline in rent values at the onset of the pandemic. From March 2020, when international borders were restricted, to July 2022, when restrictions were eased, Melbourne’s Inner rent values only rose by 1.1%, compared to the national increase of 16.4%. Since the pandemic, overall rent growth in the Melbourne – Inner market is 15.7%, significantly lower than the national figure of 28.4%. Notably, longer-term rent value growth exhibits a weaker correlation with overseas migration. The reason high overseas migration markets show more moderate long-term rent growth may be twofold.
The onset of COVID-19 border closures initially created a negative demand shock in these markets. Secondly, these markets attracted substantial new high-density development over time, contributing to relatively lower rent growth over an extended period. Implementing migration caps in Australia might diminish incentives for investment housing in these markets long-term, potentially leading to a demand shock if those caps are lifted.
Diverse Factors Contribute to Rising Housing Costs Beyond Migration
The early stages of the pandemic witnessed a substantial decrease in the average number of individuals per household, adding approximately 120,000 households to dwelling demand, particularly during border restrictions.
This trend was further fuelled by increased household income from government stimulus and low interest rates, encouraging individuals to invest in more spacious homes. Examining longer-term trends, various factors have played a role in reducing average household size, including the aging population and declining marriage rates. Moreover, the private rental market has experienced heightened demand over the decades, driven by decreasing rates of home ownership and a diminishing share of social housing within the overall housing inventory.
The impact of these factors became notably apparent between March 2020 and July 2022, when international borders were predominantly closed to overseas arrivals, coinciding with a national rise in rents by 16.4% during that period.
Trade-offs in Migration Reduction
Decreasing the intake of migrants in Australia involves navigating complex trade-offs. The country presently operates an essentially uncapped temporary visa program, and establishing long-term targets for both temporary and permanent migrants could facilitate more effective planning for infrastructure, housing, and services.
However, it is crucial to acknowledge the economic trade-offs associated with limiting temporary migration, as such measures can be tricky to implement. Emphasising the potential benefits of higher levels of skilled migration, recent developments in the UK, where visa rules were relaxed to address shortages in the construction sector, provide a noteworthy example.
Similarly, the Western Australia state government has announced a grant of up to $10,000 to support the settlement of skilled migrants in construction, aiming to boost dwelling completions. Recent data from the Australian Bureau of Statistics (ABS) reveals that net overseas arrivals of skilled migrants reached approximately 71,000 in the year leading up to August, surpassing long-term averages. This influx of skilled migrants has the potential to enhance the economy’s productive capacity, a crucial consideration in a high inflationary environment. While reducing migration intake presents challenges, a strategic approach prioritising skilled migration could address current housing shortages and contribute to economic productivity.
So, The substantial influx of net overseas migration to Australia is contributing to immediate demand-side challenges in housing costs, especially within specific rental markets. However, there are more viable solutions than implementing a temporary migration cap to alleviate these demand-side pressures because it introduces heightened market volatility. A more effective approach would involve establishing a consistent, longer-term migration target, enabling improved planning for housing supply, albeit with potential trade-offs for overall economic growth, and incentivising mum and dad investors instead of penalising them.
Recognising migration as a strategic asset it is crucial in cultivating a more productive labour force, essential for developing housing and infrastructure. On a domestic front, alternative policies should be explored to address the supply-demand imbalance, such as incentivising the more efficient utilisation of existing housing stock.