Where have all the students gone? After two years of Covid and closed borders, what’s the damage?

After two years of Covid, it’s time to undertake a damage assessment.

The pandemic has indeed badly affected some markets, but it doesn’t change the underlying demographic bedrock of the Australian market.

In the heady, demographically intoxicating years leading up to the pandemic there was only one narrative driving prosperity and property opportunity in Australia.

We were part of a global community where skilled workers, backpackers, foreign students, tourists and seasonal workers were all crazily clamouring for a share of the great Australian lifestyle.

Immigration shapes Australia … drives property demand

When recent immigrants and other new long-term residents were added to natural increase (excess of births over deaths) the Australian nation surged ahead in leaps of 400,000-and-more per year. This was extraordinary stuff; it demanded a response from the property industry.

The inner city was transformed into a Manhattanesque landscape of ever taller apartment buildings. Australia’s endearingly daggy suburban culture yielded (a tad too easily in my view) to the ascendant, to the rampant, to the hipped-up culture of the inner city.

And then along came Covid.

Instead of Australia adding 400,000-or-so every year the figure for the 2020 financial year (including a Covid-affected last quarter) dropped to 328,000. But then came the crunch: international borders remained closed for the whole of the 2021 financial year.

New growth figures for this particular year have just been released. Barely 45,000 was added, inclusive of natural increase; clearly more students and backpackers left Australia than expat Aussies returned to Australia.

Demand for rental accommodation plummeted in response. The international border hose that fed both oxygen and accelerant (well, students, visitors, immigrants, backpackers) into the inner city and especially to the CBD (and university) fringe property markets, was kinda kinked. And it wouldn’t unkink until February 2022.

Students, backpackers and others skedaddle … leave a hole

So, what has been the impact of two years of closed borders on the property market?

I feel like the captain of a submarine that has just taken a (demographic) hit. We need a damage assessment. Is it fatal? Where was the scale of the impact? Which markets have been affected? Has the loss of some markets triggered an expansion of others?

Let’s run some tests. Using the most recent data published by the ABS I have created a chart which tracks net change in the actual Australian population by single year of age over the five years to 2021. The shut borders affected the last quarter of the 2020 financial year and the whole of the 2021 financial year.

Despite Australia adding roughly 295,000 births per year over the five years to 2021, the 0-4 population went backwards (see Chart 1). The only way this could have happened is if kids in this cohort left the country with their 20-something parents.

In fact there was a net outflow from Australia over these years between the ages of 18 and 25 which are peak student years. (I am surprised so many had babies/toddlers.) Twenty-something students, backpackers, seasonal workers and others clearly exited Australia with their young families when Covid hit.

This outflow had an immediate impact on the rental market and especially in the inner city and in university precincts. The return of international movements from February is a bit like filling an empty swimming pool with a garden hose; it’ll take until 2023 before there’s depth to and price tension within the inner-city rental market.

Take for example the 23-year-old cohort. In 2016 there were 347,000 residents aged 23; by June 2021, this number had dropped by 4 per cent or 17,000 to 330,000 with much of this loss occurring in a single (FY21) year.

 

Losses in the mid-40s and in the mid-50s aren’t related to the pandemic. This is a demographic quirk of Generation X (born 1965-1982) who follow the baby boomers. The mid-50s’ shrinkage, if I can call it that, results from the rise of the contraceptive pill in the late 1960s. And which means by the late 2010s, Australia began to experience a severe shrinkage of 50-somethings.

Fewer 50-somethings from one year to the next diminishes the market for, say, financial planners who specialise in prepping this cohort for retirement.

But the up-and-down Xer story doesn’t end there. There’s more Xer shrinkage in the 40s caused by diminished immigration levels in the high-inflation, high-unemployment late 1970s. For a few frenzied years in the decade of mullets and flares Australia wasn’t the attractive destination for immigrants that it is today.

And so a serious shortfall of students has beset our nation caused by the Covid menace and resulting in weakened demand for student and young worker accommodation.

Let’s hope that the numbers recover although I doubt that we will see the inflows from China recover to their pre-Covid peak.

Outlook rosy in an opened-up Australia

In the second chart I track the projected change in population by single year of age over the five years to 2027. This data is sourced from pre-Covid ABS projections and so assumes a “return to normal” levels of net overseas migration.

What doesn’t change in this outlook are the cohort scars on Generation X caused by contraception and diminished immigration all those decades ago.

The millennials are there too, peaking at the trophy-property-purchasing age of 44, outbidding all others confident that they have another 20 years in the workforce to repay housing loans (see Chart 2).

Indeed the number of 44-year-olds is set to jump by 62,000, or 19 per cent, from 323,000 in 2022 to 385,000 in 2027. I wouldn’t have thought this outlook is unduly dependent upon Chinese students. This cohort is baked into the Australian market.

And that’s because 44-year-olds in 2027 were born in 1983; they are the first-wave millennials (1983-2001) spilling out of inner-city minimalist apartments in search not of serenity but of space for a growing family. The millennials start tripping across the 40-line into the realm of middle age this year.

I have always thought that about one-third of a generation needs to pass through a gateway (say, middle age) before it becomes apparent how they will reinvent that particular stage of the life cycle.

And so by around 2028, say late this decade, there could well be stories, narratives, and a trail of eye-rolling teenagers that combine to explain why middle-aged millennial parents are, like, so embarrassing.

Markets on the move

So, what does this mean for the immediate future?

● Students back: Opened borders will slowly recover depleted student, backpacker, skilled immigrant and seasonal worker labour pools later this year. But due to geopolitical shifts these labour pools may stop short of filling to their pre-Covid peak.

● Rents rise: The depleted foreign student market has weakened demand for rental accommodation over recent years and especially in apartment precincts. That market must strengthen throughout 2022 and into 2023.

● Middle-aged millennials: Over the coming years the accommodation market is likely to shift from rental to home ownership as millennials, and echo of the baby boom, transition from single/couple 30-somethings into the family development stage of the life cycle that begins at 40.

● Gen X soft spots: Ageing Xers in their 50s are likely to disappoint a retirement market that has prospered on an ever-expanding baby boomer retiree market. Gen X is a thinner, trimmer, more agile pre-retirement cohort; only the best (retirement) service providers will survive the 2020s.

The pandemic has indeed badly affected some markets, but it doesn’t change the underlying demographic bedrock of the Australian market. Boomers will dominate retirement. Millennials will morph into middle age. Xers will prep for retirement. And students will return perhaps in a different mix and maybe not to their pre-Covid levels but sufficiently for business to plan their next big project.

Bernard Salt is executive director of The Demographics Group, graphics and data by data scientist Hari Hara Priya Kannan