5 things to know about migration and the property market

Sascha: [00:00:02] Welcome to the Dive, the podcast that asks who said business news needs to be all business. I'm your host, Sascha Kelly. Overseas migration is frequently being called out as one of the primary factors influencing the housing market at the moment. As Core Logic writes, in the face of high interest rates, a low consumer sentiment and stretched housing affordability, values and rents continue to rise and vacancy rates plummet as net overseas migration has hit record highs. Today I invited Core Logic's head of Research Eliza on to the podcast to talk about one of their recent articles that talks about this very point. It's Monday, the 27th of November, and today I want to know what other five things I should know about migration and the housing market. To talk about this today, I have the pleasure of being joined by Eliza Owen, head of research from Core Logic. Eliza, welcome back to the dive.

Eliza: [00:00:56] Thank you so much for having me. 

Sascha: [00:00:57] You wrote this blog about the five key things that we should know about migration in the housing market. I'd love to go through these points one by one. So let's start with the first, and that is that the short term impact is really being felt by those in the rental market, which I myself am sorry, definitely understand this. Can you tell me what the data you're seeing is demonstrating? 

Eliza: [00:01:19] Definitely. So one thing we know about overseas migration is that in terms of housing Kenya, it skews to the rental market far more than sales. In fact, if we look at the record pace of overseas migration that we're seeing at the moment, sales volumes across Australia are actually relatively flat and they're much lower than they were in 2021 when sales volumes peaked at around 620,000. We didn't actually have overseas migration flowing through to Australia because of Covid. So sales volumes have settled to about 470,000 over the past year. Now that makes total sense. If you're a student who's coming here to study for a couple of years or maybe someone who's on a temporary working visa, that doesn't mean you're going to come to Australia and buy a house so that you have somewhere to live. You're going to enter the rental market. ABS data also reinforces this. It shows that for recent overseas arrivals, around 61% of permanent migrants are in the rental market when they first get here. And for temporary migrants it's more like 70%. And then the longer overseas migrants are in Australia, the more likely they are to own their own home. 

Sascha: [00:02:33] Eliza, the second point you write is that we're seeing higher migration because it was previously restricted. Can you explain how this pressure in the migration system is now currently being worked out? 

Eliza: [00:02:44] So I think it's first and foremost important to understand what we're talking about when we talk about overseas migration. You might hear this figure that overseas migration is running at record highs. It's running at over 500,000 by some economists estimates. What we're talking about there is net overseas migration. Net overseas migration is made up of arrivals to Australia, but also departures from Australia. Arrivals are at record highs, but departures are also really low. So you've got more people arriving but also less people leaving, which is pushed up that net figure. And the reason for that is because we temporarily shut off migration through Covid. So that means that fewer people arrived. That would have been leaving now. So that's why your departures are down. But also there's probably this pent up arrival activity. So at the moment, we're not only seeing people who want to come to Australia, but people who wanted to come to Australia for study or work and pause that decision. And so it's all of this kind of pent up arrival demand as well. If we hadn't had that temporary shutdown of overseas migration net, overseas migration at the moment would be much lower than where it is. My estimate would be about 300,000 over the past year as opposed to 450,000 and 300,000. 

Sascha: [00:04:11] How does that compare to what? I hate using the word normal. But pre-COVID, what did normal look like? 

Eliza: [00:04:18] Yes. So it is still much higher. If you look at the historic decade average figure for net overseas migration, it's about 217,000 people a year. So that's now sitting at 454,000 for the year to March 2023. Overall, I would estimate that net overseas migration to Australia is still lower over the course of the past few years. Had we not put the cap and the ban on migration. But there's no denying that the ban created volatility and it's led to a really acute period of. Elation due to overseas migration as of 2023. 

Sascha: [00:05:04] Okay. I'm not going to leave the Covid story just yet. Before we get into the stuff that's affecting us currently, your third point as well unpacks the impact of the pandemic because Covid, as you said, that V word volatility, it created volatility in the rental markets. Has this volatility just hidden a trend that would have been more linear if our migration wasn't so constricted over the past three or so years? 

Eliza: [00:05:30] That's a great question. There are definitely factors that have contributed to increases in rents even without the overseas migration piece. That partly comes from a rapid drop off in household size, which is something that happened again, particularly through the pandemic. We saw a lot of rental share houses breaking up, for example, because more people were working from home. They wanted more space to do that. 

Audio Clip: [00:05:58] We have seen an increase of internal population movements. People move from one place to the next. This is largely driven by the increased opportunities to work remotely. The regions are the big winners of this movement. 

Eliza: [00:06:13] People perhaps wanted more space because they were worried about dense living in the context of a global pandemic. So that contributed to about a 6.5% increase in rents when overseas borders were shut. I think what's happened now is that we're almost going through, for lack of a better term, second wave of rental market increases. But they're only really affecting the markets that are historically exposed to overseas migration. So areas like Parramatta, the inner south west of Sydney, the inner suburbs of Melbourne, the western suburbs of Melbourne, these are areas that have historically had high exposure to overseas migration as a source of population growth. So it makes sense that when you open up the borders, we get all that pent up arrival demand and flow coming through to the country. Those are the markets. Since we open borders that have seen the most acute increases in rents averaging about 18% since July last year.

Audio Clip: [00:07:13] In inner city Melbourne. Demand from potential renters has nearly doubled since this time last year. It's a similar story in Sydney, particularly in Parramatta. We've actually seen that demand from potential renters has more than doubled. And in Brisbane, inner city as well. It is also a similar story.

Eliza: [00:07:30] But if you look at rental markets longer term, the biggest increases have actually been in markets of Western Australia, like the Pilbara, for example, and parts of Perth. And part of that is more due to a little bit of fluctuations in population growth because of the borders as well. But the recovery in the mining sector that we've seen in the past few years. 

Sascha: [00:07:51] More to come of my conversation with Eliza Owen, including Eliza, a solution to this problem. We talk about how it's not just as simple as reducing migration. More of that to come in just a minute. Welcome back to the dive if you're new and joining us for the first time. Welcome. Thanks for joining us. Could you do me a small favour and jump in your podcast plan and give us a five star review? It really makes all the difference. Getting our podcast in front of me is now back to my conversation with Eliza on Head of Research from Core Logic. Eliza, your fourth point, and I think you've kind of touched on it, but basically we shouldn't focus on migration being the only cause and the only thing that's adding to this demand side pressure for housing costs. What are the other elements?

Eliza: [00:08:43] Yeah, I think this is really important because migration is going to be quite a sensitive topic and just more topical because not only are we seeing very high levels right now, but governments also kind of done this review of our migration system. And I don't think that policy should be informed by what we've seen over the past couple of years. So the other thing to consider is that that reduction in household size that we've seen through the pandemic increased rents largely and the RBA estimates the reduction in average household size or fewer people living in each dwelling has increased dwelling demand by 120,000 properties through the pandemic period, even without the pandemic influence. Longer term, you could argue that average household sizes have been falling because of demographic trends. Think about empty nesters, for example, people living longer and maybe resisting downsizing because that can be really hard to do with tax settings and the properties that are available. So those things fundamentally add to demand as much, if not more, than the flow of overseas migration. Hmm. 

Sascha: [00:09:53] So lastly, your point, which I think we've already started discussing. It's not as simple as just reducing migration as a solution. What are the other considerations that we have to factor in? And then potentially, if I can ask you to be so bold. What other solutions should we be looking at? 

Eliza: [00:10:10] Look, I'm not a demographer. I'm not a policymaker. I don't claim to be an expert in this space. But from doing this research and writing this blog, I kind of came to the conclusion that a temporary cap on overseas migration, while we quote unquote sort the housing market, is a really bad idea because we already tried that during Covid, right? We already closed off our borders. And not only did we still see rents rise anyway, but it actually led to a lot more volatility in both migration and rents when we reopened borders. The other thing to consider is that while migration can be a challenge for the housing market, it can also be part of the solution. For example, we're seeing Western Australia introduce grants which actually incentivise the settlement and try and attract skilled migrants who are working in construction and can help to deliver the pipeline of housing. 

Audio Clip: [00:11:08] So the Western Australian governments folded w a government is basically giving out 10,000 AUD for construction workers that are interested in migrating to Western Australia and helping build the state. 

Eliza: [00:11:23] The migrant population on average is younger and more productive in the workforce than the broader Australian population, which makes sense because a lot of our migrants are young and skilled. I think there is a place for targeting migration and I think that is something that the Federal Government hinted at in their really comprehensive review of our migration strategy. 

Sascha: [00:11:45] So when you say targeting migration, what does that actually mean? 

Eliza: [00:11:49] So it might look like a long term limit on not just how many permanent migrant arrivals there are, but they talk in the review about this more holistic view of net overseas migration as a whole, which is made up of permanent migrants, but also temporary migrants. Yeah, and the temporary piece doesn't really have caps on it at the moment. So what the review alluded to was that targeting overall net overseas migration, whether that's limiting it to a certain percentage growth each year or a number that might be a better way to, I guess, create a tailored migration program long term. So we're setting clear expectations for the international community that can help us create a more sustainable infrastructure and housing delivery. 

Sascha: [00:12:44] Eliza, I could talk to you about this all day, but I think we might have to leave it there for now. Thank you so much for joining me on the dive today. I will also be linking that blog that you wrote in Astronaut. If anyone's curious to read more. Thank you so much. 

Eliza: [00:12:58] Thank you for having me. Great to be here. 

Sascha: [00:13:01] And that brings us to the end of the episode today or leave it there. I'll be back. In your faith on Friday. Until then, have a great week.