Student cap to have little effect on housing availability

The federal government’s proposed international university student cap sounds like a big restriction, but it needs to be put into perspective, REA economist Anne Flaherty writes.

College students listening to their professor in a lecture hall.

In news that has sent the education sector spinning, the federal government has announced legislation that would put a cap on new international student ­commencements.

If the legislation passes, the number of commencements would be capped at 270,000 for calendar year 2025, as part of a wider move to slow down migration.

While this represents a significant drop of about 53,000 students compared to the number accepted in 2023, last year’s figures need to be put in perspective.

The number of international student visas granted last year was the highest on record.

In significant part, the high volume was due to pent-up demand caused by the collapse in student numbers during the pandemic.

Compared with pre-pandemic levels, however, the cap represents a drop of only about 7000 students.

So how much of an impact is this likely to have?

While the coffers of universities with high exposure to international students will undoubtedly take a hit, the cap is unlikely to have too much of an impact across the broader economy. Nor is it likely to provide much relief for the property market. At least, not yet.

Overseas students typically spend several years studying in Australia. This means that many among the record wave of students that arrived last year will be here for some years yet.

From a purely economic perspective, a high number of international students is good for Australia’s economy. Education is Australia’s fourth-largest export and brought in a whopping $36.4bn over the 2023 financial year.

It was certainly one of the factors that prevented Australia from entering into a technical recession last year.

Unfortunately, this surge in international students and broader migration has come at a time when our ability to deliver new housing has been severely hampered by labour constraints and high construction and capital costs.

As a result, the number of homes built in Australia needed to accommodate population growth fell short by about 87,600 in 2023.

There is no question that high levels of migration have been a key driver of the rental crisis. A total of 767,120 people arrived in Australia on temporary student visas over the 12 months ending in June 2024. They were spread across higher education, vocational education and training, schools, and English language courses. This placed instant pressure on an already strained rental market, and is one of the contributing factors behind the low vacancy rates and high rent growth over the past two years.

Rent growth from surging student numbers is more obvious in “student suburbs”. Examples include Clayton in Melbourne, home to Australia’s largest university, Monash, which recorded a 20 per cent increase in unit rental prices over the 12 months ending in July, and Glebe, near the University of Sydney, where rents rose by 17 per cent.

There is no question international students are a major boon for Australia’s economy, but more people necessitates more homes, and unfortunately, we are not building these homes fast enough.

This fact has been recognised by the federal government which, in announcing the cap, acknowledged the need to “encourage universities to create new supplies of student housing to benefit both domestic and international students”.

On this front, there are some positive signs.

In recent years, state and federal governments have been repealing some of the tax barriers preventing offshore institutional investors from developing residential projects in Australia, such as purpose-built student accommodation and build-to-rent housing.

Foreign investors typically use managed investment trusts to buy Australian real estate and can be hit with a 30 per cent withholding tax. The legislation currently under review would reduce the withholding tax to 15 per cent.

Given foreign investors account for the vast bulk of capital driving the development of student housing and build-to rent accommodation, should this pass it would probably stimulate development at a time when the need for more rental accommodation is critical.

Anne Flaherty is an economist at REA Group.