The impact of an immigration explosion is about to rattle the property market

The substantial uptick in immigration this year is going to change the economy and the most immediate change will be in the property market.

As an investor, the arrival of 400,000 migrants inside 12 months is what you might call ‘‘material’’ in assessing opportunities in the year to come.

Here’s an economic nugget worth keeping in mind. For every 100,000 arrivals in Australia, average house prices increase by 1 per cent.

Many analysts underestimated immigration last year and, as a result, their forecasts missed the mark. This year those analysts are unlikely to make the same ­mistake.

Let’s be clear, 400,000 arrivals inside a year is an extraordinary figure. It is the population of a city just a little smaller than Canberra arriving at the airport.

As the Oxford Economics group reports: “In line with the sharp rebound in net overseas migration, Australia’s population growth increment is forecast to hit a record 523,500 this financial year – 80,000 above the FY2009 high point.”

It is almost unprecedented. In fact you have to go back to 1971 to get a period where population growth was anything like it.

Property analyst Michael Matusik has been running the numbers and he explains that in 1971 the total population increase was 535,000. (Of course, back then the population was only around 13 million.)

Phew! 1971 had almost twice the pace of economic growth we have today … 4 per cent was the norm in those days.

It was fun while it lasted, only to end in the inflation-fuelled havoc of the late 1970s.

As Matusik said: “The real difference between our market and previous periods of high immigration is that supply in our market has been tight – even when the borders were closed during the pandemic, the market was tight.”

As for inflation, we just don’t know whether this population boost will be inflationary.

Weighing up the pros and cons of the population influx, HSBC chief economist Paul Bloxham recently did a deep dive into the issue. He weighed up the pressures that new arrivals add to the property market against the benefits they bring to the jobs market.

On balance, Bloxham explained that ‘historical modelling suggests rising inward migration tends to be inflationary, but the pandemic has presented unique circumstances, which may limit this model’s usefulness’.

“Our central case is that the effect on inflation is neutral overall.”

Either way, we have a damn good idea what substantial immigration does for the property market; it drives prices higher.

Matusik cited the rule concerning 1 per cent price growth per hundred thousand arrivals. “In our market it means an extra 4 per cent on house prices irrespective of what the Reserve Bank may be trying to achieve,” he said.

New arrivals

The immigration boost is a key reason why the major banks are calling house price lifts of 3 per cent this year and 5 per cent next year despite the ‘‘mortgage cliff’’, or any decline in consumer spending.

What’s more, further rate increases are not going to knock this property rebound off course. There is every chance the RBA will want to deliver at least one more rate hike, but it will not change the picture.

Put simply, immigration-driven population growth will outweigh interest rate effects.

Besides, at the top end of the market interest rate changes matter very little. The very rich may not even have a mortgage (more on that later).

Behind the scenes, the market’s key players in mortgage finance are already positioning for reductions in interest rates which may come to pass next year.

Take a look at CBA and Westpac blatantly testing the prudential regulator by cutting their ‘‘buffer rates’’ on mortgages. APRA says the buffer – the amount added to a home loan interest rate to stress test ‘‘serviceability’’ – should be 3 per cent. The banks are cutting this to 2 per cent they would not be doing this if they believed the market was moving in any direction other than upwards.

Many of the 400,000 new arrivals are students and younger workers who will boost the economy in a variety of ways. Crucially, they may cushion the wider economy from a recession.

But they will only exacerbate a shortage in the rental market.

As NAB’s market research team puts it: ‘‘Rental vacancy rates are very low; asking rents have been rising at a fast clip, driven by the rebound in immigration and population growth after the opening of Australia’s borders.’’

Moreover, this underpinning of the rental market could extend for years to come. Demographer Bernard Salt, writing in The Australian this week, predicted ‘‘hyped demand for student and other 20-something rental properties later this decade’’.

 

Elevating upper end

But it is at the other end of the spectrum where the most immediate investment impact is going to take place, because inside those annual migration figures are some of the world’s wealthiest migrants.

To be precise, there is a cohort ready to inject at least $7bn into the local property market because Australia has just become the No.1 destination in the world for high net worth investors.

The annual UK-based Henley Private Wealth Migration report has revealed that Australia passed the UAE in the past 12 months. “Australia is set to get a large influx of the world’s wealthiest,’’ says the report.

It also details how 5200 migrants with at least $US1m ($1.5m) in ‘‘investable assets’’ will move to Australia this calendar year. They are mostly from China, India and more recently from post-Brexit Britain where there is an ongoing ‘‘millionaire drain”.

Property market analysts say evidence is building already that the top end of the Australian real estate market is changing tempo.

According to Ray White chief economist Nerida Conisbee: ‘‘Premium suburbs are now leading the recovery in prices.”

As local investors it may seem that what is happening to property prices elsewhere is of little consequence. But on this week’s Money Puzzle podcast, I asked Yarra Capital Management chief economist Tim Toohey whether Australia was expensive in relation to the rest of the world.

Toohey explained that in terms of the OECD tables on the metrics that matter – such as price versus income – Australia was merely in the middle of the pack.

As Conisbee said: “If you are looking at an international property buyer who is not sensitive to interest rates and, for example, they have been looking at London prices and then they are assessing value in Queensland, they may well view it as a bargain.’’

The immigration influx is the remarkable local feature of the Australian economy this year.

Inside the property market it is more important than inflation or rates or any other factor.

At the top end of the market one thing is clear: prices are going to lift off from the rest of the market in a way that may catch many by surprise.