What will the drop in overseas migration mean for our property markets?

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What will the drop in overseas migration mean for our property markets?

Border closures and restrictions on movement as a result of the pandemic have had a big impact on population growth. In the year ending June 2020, overseas migration to Australia fell by 23.7 percent. The 2020 budget is forecasting that population growth will dip into the negative in 2022 for the first time since World War II.

Some commentators are alarmed, especially when it comes to the property market. A recent National Housing Finance and Investment Corporation study revealed that demand for housing in Australia could fall by up to 232,000 dwellings over the next three years as a result of less overseas migration. If supply ends up outstripping demand we would see a fall in property prices. 

While this may seem concerning, we believe there are several reasons why the alarm will prove unwarranted. But first, let’s look at the current situation more closely. 

A two-tiered property market? 

The Australian property market is made up of sub-markets which perform uniquely. It’s reasonable to expect that the drop in overseas migration will affect each market differently. 

In this case, migrants are more likely to buy property in greenfield areas with brand new estates or rent in higher density suburbs, so we can expect these areas may perform worse than usual. 

However, more mature markets which are less likely to attract migrants are less likely to be affected. In fact, even though population growth is on the decline, several property markets are hotter than ever with increased competition for both buyers and renters. 

So, what does the data tell us? 

Binnari Property has undertaken an analysis into the uneven impacts the drop in overseas migration has had on property markets in Sydney, Melbourne and Brisbane and found that transient, highly dense suburbs have fared worse than owner-occupier, lower supply suburbs. 

Transient suburbs usually attract higher levels of apartment supply. This is typically driven by council zoning which favours population density. These suburbs are also usually close to universities and are therefore appealing to international students and migrants. With the decline in overseas migration, these areas have been significantly affected (see figure 1). 

FIGURE 1 – Vacancy rates in transient versus low supply suburbs in Sydney, Melbourne and Brisbane

Sydney – Transient, highly dense suburbs:

  March 2020 October 2020 January 2021
Parramatta 3.7% 6.0% 5.9%
Ultimo 3.8% 8.6% 4.5%

 

Sydney – Owner occupier, lower supply suburbs:

  March 2020 October 2020 January 2021
Summer Hill 2.1% 3.6% 3.9%
Randwick 2.2% 4.1% 2.8%
Drummoyne 1.8% 3.1% 2.7%

 

Melbourne – Transient, highly dense suburbs:

  March 2020 October 2020 January 2021
Docklands 4.4% 18.8% 13.2%
North Melbourne 2% 8.4% 8.5%

 

Melbourne – Owner occupier, lower supply suburbs:

  March 2020 October 2020 January 2021
Brighton 2.6% 4.8% 3.5%
Ivanhoe 1.5% 3.1% 4.5%
Doncaster 1.0% 3.2% 2.9%

 

Brisbane – Transient, highly dense suburbs:

  March 2020 October 2020 January 2021
Fortitude Valley 3.4% 7.9% 5.3%
Bowen Hills 3.4% 8% 5.1%

 

Brisbane – Owner occupier, lower supply suburbs:

  March 2020 October 2020 January 2021
Greenslopes 1.7% 1.8% 1.6%
Newport 2.3% 1.2% 1.2%
Fairfield 1.9% 2.1% 1.7%

 

For example, in Docklands in Melbourne, a highly dense, transient suburb which has 97% units and 67% of dwellings rented versus owner-occupied, vacancy rates more than quadrupled from 4.4% in March 2020 to 18.8% in October 2020. In January 2021, vacancy rates were still high at 13.2%. If we compare that to Brighton in Melbourne, which is largely made up of owner-occupiers and is more tightly held, vacancy rates were 2.6% in March 2020, grew to 4.8% in October 2020 and were down to 3.5% in January 2021. 

In transient, high density suburbs, the drop in demand for housing from international students and overseas migrants hasn’t been countered by local demand, unlike predominately owner-occupier areas where low supply and record low interest rates have meant that sales activity has remained strong with local buyers flocking to the market (see figure 1). 

So, we know that the drop in overseas migration is affecting different markets uniquely. So, is the alarm over a decline in population growth warranted? We don’t believe so and here’s why: 

The situation is temporary – Australia is likely to increase our overseas migration cap when normal service resumes

It’s important to remember that the decline in overseas migration isn’t part of an ongoing pattern. There isn’t a decline in interest in migrating to Australia. The issue is tied directly to the border closures as a result of the pandemic. That means we should see a very sudden uptick once international borders reopen. 

To make up for the drop in migrant numbers throughout the pandemic, Australia is likely to increase the cap on overseas migration once possible until the gap is closed. Demand for entry into Australia for migrants has always outstripped demand so any increase in the cap will be taken up quickly. 

Australia will become even more attractive to migrants and ex-pats 

Australia has fared well compared to the rest of the world throughout the pandemic. We have a stronger economic outlook, our pandemic response has mostly been very effective and we’ve had greater political stability. This means that Australia will become a leading destination for investors and migrants seeking stability and safety. 

Once borders reopen we can expect a spike in overseas migration from places like Hong Kong, where many people will be seeking to flee the unrest there, the US, the UK and South Africa. That will include migrants seeking out a better quality of life in Australia, international students and returning Australian expats. 

Roughly a fifth of Australia’s expat community came home in 2020 which is a total of 43,800 Australians. Another 36,000 are still trying to get home. Expats are buying houses in established areas, contributing to demand and tightening supply. This will go part of the way to reducing the impact of lower overseas migration. 

First home buyers are driving demand 

One of the reasons demand for property hasn’t declined, despite less overseas migration, is first home buyers. Like migrants, first home buyers are new entrants to the Australian property market. Unlike upgraders or down-sizers, they increase net demand for property. With record low interest rates and several incentives for first home buyers, including the First Home Loan Deposit Scheme (FHLDS) which added an additional 10,000 places under the budget, many first home buyers will be entering the market now and in the near future. 

So how can an investor navigate the changing environment and the unique sub-markets

The focus for an investor shouldn’t stray far from what we’ve always believed to be key to successful property investing. Understanding the supply/demand equation is a key component of investing. Investors should target locations where supply levels are currently low, but most importantly the potential for new supply is also limited. Identify locations with a high proportion of owner occupiers to ensure your property is less susceptible to the risk of vacancy or oversupply that may be caused by the lack of migration. 

It’s then important to ensure the property you purchase is attractive to the local buyer pool. Ideally you should view the property through the eyes of a local buyer and purchase an investment that has the attributes and features that will appeal to tenants and future buyers.

If you’d like to know where the best markets are for investment in 2021, click here to get in contact with the Binnari team.