The Migrant Housing Boom
Migration is essential to Australia’s economic and social prosperity.
Why We Need Migrants
Although migration does have a troubled social past, our country has been forged on the backs of hard working immigrants, whether from the UK, Europe, Asia or elsewhere.
Yes, there are culture shocks as accepted ways of living are challenged, such as when foreign languages are displayed on advertising signs in certain social hubs, but Australia lacks the necessary demographic power to survive on its own; the social and economic problems of our aging population require intervention.
You see, skilled migration represents a sneaky way of importing talent without paying for it, as the country the person is moving from has paid for the education and rearing of the person immigrating, yet will not receive the economic benefit of that investment through taxes and output (as the person has moved away).
The Federal Government knows this, which is why the 2014-15 migration program has budgeted for 128,550 skilled immigrants; an average of 352 persons every day.
How Migration Impacts Property Investors
Net migration increases (i.e. more people moving to an area than moving away) puts upwards pressure on housing demand, first in respect to the rentals (given new migrants normally rent while they establish new lives), and later as homeowners (once they have job security and borrowing ability).
If you can identify and invest in areas experiencing strong net migration then you can position yourself for higher rents (and less vacancy risk) in the short term, and more robust capital appreciation over the medium to long term.
Where’s Hot & Where’s Not?
The Australian Bureau of Statistics publishes periodic data on net migration, and it is from that information that I have provided the graph below.
It reveals that Victoria had the highest net migration for the year ended 30th September, followed by NSW, WA, QLD, SA, ACT, NT and TAS. In fact, Tasmania recorded negative net migration!
This brings us to the an important learning point:
House price growth ought to be more prevalent over time
in areas that experience the strongest net migration.
Consequently, the graph generic growth (i.e. market driven growth) investors have a blueprint of where to target, namely Melbourne, Sydney, Perth and Brisbane (in that order), and where not to, namely: Tasmania, NT, ACT and SA (in that order).
Yet there is also an important sub-story to tell to, and the best way to do that is with another graph (see below).
Net migration in the graph above has been broken down into its two sub-components: overseas migration and interstate migration, and now an all together different picture emerges with VIC, WA, and recording positive net interstate migration, and NSW, SA, ACT, NT and TAS recording negative net interstate migration.
Generally speaking, people move overseas for long term or generational opportunity, but interstate for more immediate job and lifestyle reasons. For this reason, net interstate migration is expected to have a more immediate impact on the economy.
Consequently, although NSW receives the largest number of overseas migrants, it has the largest exodus of residents leaving to other States, and as they go they take their economic prosperity with them.
Now it seems that Victoria – with strong overseas and interstate migration – is the place to invest, a point echoed by respected demographer and KPMG partner Bernard Salt when he commented “(the net migration) means job growth, new houses, new finance, new infrastructure – that creates new opportunities and it attracts people from interstate. It’s just important that the city learns how to manage this scale of growth.”
It should be noted that Mr. Salt and I live in Melbourne, but there is no conspiracy here because the ABS migration figures are real.
Conclusion
Unfortunately, successful real estate investing is not as easy as following one data series, even if that data series is as critical as net migration. House prices are affected by many variables – both economic and psychological.
Yet choosing to invest in an area currently experiencing strong migration is certainly a strategic decision that will position an investor to profit from above average generic market gains over the medium to long term.
You are well advised to monitor population trends closely.
That’s my say, let me know what you think by leaving a comment below.
Comments
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I get that we need more people, but surely Australia doesn’t have the existing infrastructure assets to cope with a migration explosion. Where’s everyone going to live? How are my kids going to afford a home? BHH
Agree with most of what the article says, however, when the analysis is done on the basis of a single graph or set of statistics, I get very uncomfortable.
Surely there is an impact of the Dollar versus the Yuan and the Pound?
You could then link that to not only new migrants buying properties, but existing Australian residents purchasing property.
Would suspect that there is a more immediate impact on demand for rental properties?
Like Steve’s rundown.
Totally agree that one measure alone is inadequate Orrin.
That said, I did try to isolate that one indicator and comment on it in isolation.
I also agree Aus does not have the infrastructure in play now to cater for sustained immigration. This is a big issue that politicians – State & Federal – need to tackle.
I think that in time we have to let go of our traditional 1/4 acre block home ideals and adopt a more Asian or European approach to housing where the norm is to live in an apartment, and there are better communal resources (i.e. parks, etc).
Keep the discussion coming!
– Steve
This is great news! Awesome stats Steve. I feel a little bit better about my investing after readin this. Everyday there’s a new article about Australia’s property bubble due primarily to the fact that wage growth has not increased in proportion with housing prices. Yet with increase in migration surely there will be enough demand in Aus property for a few more years and prevent a potential property market crash. Also with the AUD likely to fall further it becomes cheaper for these migrants to buy/rent property in AUS. The property market in China has also fallen and it may be the case that wealthy Chinese investors will seek to put their money elsewhere e.g. the Aus property market….The question is, could rampant investment from China and increase migration drive property prices so ridiculously high that locals cant afford property any more despite the RBA keeping rates as low they can? If people cant afford houses will that pop the bubble?
Excellent information to add to the DD Toolbox to use when planning investment. Where population changes are a factor to consider, this info is gold and could make all the difference. Thanks Steve.Cheers. thecrest
According to ABS Capital city house price data (Cat 6416.0), in Sydney and Melbourne, the cities with the highest overseas migrant intake, median house prices rose by 25% in 2010, the largest price rise since 2002. How do you reconcile this with the fact that overseas migration to these cities fell in 2010 to half the intake of previous years and remains the lowest for a decade.
Hi John,
Your question raises the thought in my mind, if house prices increased as they did at below trend migration, what will happen to house prices if migration returns to trend?
In regards to the cause of the increase you indicated, low interest rates would be a big demand-pull factor, combined with (as I remember) quite low housing supply. Naturally, good old speculation had its part to play too.
– Steve
Actually, interest rates in 2010 were higher than for years before or since. I would consider that the rise was caused by a huge growth in housing demand from the trebling of the FHOG by the Rudd Government which made raising deposits much easier. My point is that housing prices will only rise is there is a rise in households, availability of finance and a shortage of housing stock.
Great thoughts Steve. Perhaps as technology empowers more people to work remotely, regional areas will see some significant population growth – offering some relief from the strained infrastructure of capital cities.
Looking at immigration purely from an economic standpoint is very short sighted and doesn’t take into account the longterm implications to our quality of life. What does that mean? I have spent the past 25 years living abroad in Japan, Asia, the US and Europe, meanwhile my sister has been on a rampage of property investment buying properties, subdividing the land and building or relocating houses onto the neighbouring blocks. As a result of her and others the once spacious blocks with trees full of birds and vegetation have now become desolate rows of houses squeezed in next to each other and some out the back with a separate driveway to them. Sure she has made money but now has to live in these condensed and crowded neighbourhoods that she help to create and the sound of the birds has been replaced by the sound of the neighbours TV. One council I respect is the Byron Bay Council that set a limit on the amount of development and housing putting their quality of life above short term economic gain and as a result everyone would like to visit or live there. Living abroad teaches you to appreciate what makes living in Australia so special and why so many people from those other countries want to live here. It has a quality of life that is being compromised on a daily basis by those who focus on economic gain while the things of true value slip away. If Australia would look at and learn from the mistakes of other countries they wouldn’t creating so many unnecessary problems. We are seeing increases in crime and other negative aspects that taint our way of life. Maintaining the balance and values that made this a great place to live without fear and stress should be guiding our direction not unsustainable population growth and inter-racial problems that occur from letting too many races with strong opposing religious beliefs and cultures in too quickly without time to assimilate. They coagulate and take over entire suburbs turning them into miniature versions of their home countries resisting the need to assimilate while maintaining their own customs whether or not they are in accordance with Australian law or the Australian way of life. Immigration in moderation would result in more rapid assimilation that would contribute and benefit our way of life without forcing Australians to have to change to fit to the special needs of people who choose to come here to share our way of life. That’s enough for now… sorry a bit long winded…
Completely agree
Immigration is obviously a major factor driving demand for housing but supply is equally as important and possibly more so because on that side of the equation there is not only a volume figure, but also the matter of cost. There has been quite a bit of economic research on what influences house prices since the GFC, mostly relating to the US experience, but I think it is relevant to Australia also. In a nutshell the findings, which might seem like the bleeding obvious, are that real estate prices react differently depending on such factors as the growth rates of the underlying population (which obviously includes immigration), real income in the specific area, the size of that area and its ability to cater for new dwellings (this entails both land available for development and restrictions on density), and development costs.
The most interesting bit of research related to finding that property prices exhibit both “momentum” (that is, a tendency to move together in the short run) and “reversion” (cycle around a trend). My lay persons reading of the cycle trend is that it runs at a small margin above general inflation, the growth premium owing to the beneficial treatment of property by both lenders and the tax system. It is momentum growth that creates “bubbles” and the popping of a bubble is simply reversion when the momentum growth gets too far ahead of the trend, generally with a momentum overshoot the opposite direction. It has been shown there is less momentum growth in areas where increased demand can be quickly reacted to by increasing supply at reasonable cost.
Given that growth in wages is restrained and interest rates stable it would seem that trend growth in property prices should be relatively low and the current growth in the market is likely caused by momentum, which is not sustainable in the long term. My interpretation of this research in applying it to Australia is that, in addition to the demand caused by population increases, it the expense and time frames involved in suburban development and particularly the time it takes to obtain planning permits and the even greater time frames relating to the rezoning of land are major factors in limiting supply, while high construction costs for multi-level apartment buildings due to union activity are the most significant drivers of price growth in inner city areas.
My conclusion is that we are currently experiencing a property bubble. Immigration is maybe partly responsible, but over regulation, restrictions on supply of land, bureaucracy and high construction costs seem like more significant factors.
A bubble Alistair?
They’re fighting words in some circles and will probably draw an interesting response. It’s good to see you contributing though.
Hope all is well with the Perry clan.
– Steve
Steve everything you say is correct, but unfortunately you have only told half the story. Demand only places upward pressure on prices when supply is limited. Unfortunately for Melbourne house prices, supply is no where near as tight in Melbourne as it is in Sydney.
There are a large number of residential apartment projects underway, and significantly more ready to go as soon as the time is right – that is when developers see prices are high enough to make a return. As soon as prices push up a little, supply increases, thereby reducing further upward pressure. As for low density dwellings, the outer ring suburbs of Melbourne are far closer to the CBD than in Sydney, and with better roads and no geographical limitations (mountains, rivers etc) to prevent the sprawl.
As such, whilst population growth is certainly helpful, we are not going to see significant price growth in Melbourne until supply becomes restricted.
I say, open the flood gates and let all the skilled and unskilled migrants come in. People that really want to come and start a new life here, and become Australians. Ones that are willing to work where the work is. The business model worked very successfully in the USA. The effect on real estate is simply supply and demand. It is a fact that large groups of immigrants bring with them their own micro-economies and help to create jobs and pump money into the economy where there was none before. The real problem Australia with regards to real estate is that one day they will reach tipping point when supply overtakes demand and then you will see house prices tumble like never before. I feel we are many years from that happening if not a generation or two if we continue to grow as a nation in population and economic strength…that’s my 2 cents.
Hi Steve, I’ve always found the movement of property prices intriguing, I don’t think anybody could say that they make much sense. I hope I’m wrong re the Bubble comment, but I don’t think I am. It seems to me that prices are being driven by a combination of low interest rates, preferential tax treatment and the high cost and long time frames relating to increasing supply. Apart from the long time frames with regard to development, which I think will get worse, I wouldn’t want to bet on the others continuing along the same path I the medium and longer term.
There are some pretty significant changes in residential zoning being implemented at the moment by the way, which is going to have a large effect on the land available for development within the Melbourne metro area, you should get Frank to give you some info on this. It is info anybody interested in investing in Victoria should know, particularly developers and potential developers.
It’s always a pleasure to contribute to your website by the way. I try give some input on your forums when I can, but life’s busy with three little girls. I haven’t even got to the footy yet this year.
As skilled as the new migrants may be if they are coming from comparatively lower socio-economic backgrounds to Australian standards I see a gradual progression through the ranks through more affordable property markets, gradually to more exclusive markets as incomes and wealth are well established. Therefore in my opinion, if large numbers of migrants are entering a certain area I think the more ‘affordable’ property markets which obviously have the infrastructure to support the skilled jobs will be the first ones to benefit.
Hi Steve and all,
Are we comparing Oranges with Lemons?
ABS states 240,000 odd net immigration for the 12 months ended 30th September 2013.
The Feds budget for 128,550 net skilled immigrants.
Do the ABS figures only include skilled immigrants?
If so there has been a decline of 46% within two years!
My concern for the ageing population is who will be available to push my wheel chair to the duck pond so that I can feed the ducks? We need more immigration, and regardless of whether they are skilled or not they all need to live in some type of property. Which is where we come in.
Besides that I love Chinese Cuisine, Indian currys, kebabs, Tsatziki, Pizza, Lembas,Goulash and Goats head soup.
Sigh ….I am in a happy place now.
Best Les
The other way I thought we could / should look at the data is to normalise it by state population. Vic & NSW have the two highest populations, almost double Qld or WA (at least based on their capital cities).
Factoring that in, Qld or WA would be the highest net migration per capita of all the states
I happen to be from Qld, but that doesn’t change the numbers ;)
Mike.