Analysis by CoreLogic in its latest Property Pulse issue has shown that demand for housing will be disrupted by the decline in population growth, caused mostly by stalled net overseas migration (NOM) amid international border closures to curtail the spread of the coronavirus.
Recent forecasts from Treasury have indicated that annual population growth across Australia could slow from around 1.4 per cent pre-COVID-19 to 0.6 per cent through the 2020-21 financial year. If this materialises, it means the rate of population growth – a driver of underlying housing demand – will be the lowest since 1917.
NOM is expected to plunge from around 232,000 net migrants in the 2018-19 financial year to just 31,000 in 2020-21.
While this will disrupt housing demand, the impact will not be evenly spread, according to CoreLogic’s analysis.
From a housing market perspective, the drop in low NOM will likely result in a higher volume of rent listings and falling rent values across key inner-city precincts.
According to CoreLogic head of research Tim Lawless, rental demand may improve in these areas once foreign student arrivals stabilise.
“In the meantime, investors who own property in these locations are likely to be facing high vacancy rates, lower rents and reduced ability to service their mortgage,” Mr Lawless said.
“This may result in more distressed sale listings.”
Another impact of lower NOM rates would likely be more units settling with a lower valuation than the contract price.
The lower rates of migration would likely have the biggest impact on Melbourne and Sydney. Last year, out of the 84 per cent of all overseas migrants who went to capital cities, three-quarters of those capital city migrants arrived in Sydney and Melbourne.
Within these cities, migrants generally flocked to around the CBD and precincts close to the CBD where high-density housing options are aplenty, and to a lesser extent, middle-ring suburbs close to schools and public transport such as Parramatta in Sydney and Clayton in Melbourne.
“The impact of the sharp fall in overseas arrivals can already be seen in surging inner-city rental advertisements, with rental listings more than doubling across some key inner-city unit precincts,” Mr Lawless said.
“Between mid-March and early August, the number of homes available for rent in Melbourne’s Southbank rose by 117 percent to reach 1,230 advertised rental listings. Rental advertisements were up 111 per cent across the Sydney CBD/Haymarket/The Rocks region to reach 776 and Melbourne’s CBD saw a 105 per cent lift in advertised rentals taking the total number of homes available to rent to 2,184.”
According to Mr Lawless, many of these inner-city precincts are towards the end of a surge in new apartment supply.
Data on building activity from the Australian Bureau of Statistics has shown that there were more than 50,000 units under construction across NSW at the end of March, and just over 45,000 across Victoria. A large portion of these high-rise projects are in inner-city locations.
“Many of these yet to be completed projects will settle while rental vacancies remain high and rents are falling, which may put downwards pressure on property values,” Mr Lawless said.
The fall in demand would also likely impact the residential construction sector, but this will be uneven, according to Mr Lawless.
While demand for “investor grade” unit projects is likely to remain low for some time, demand for owner-occupier style multi-unit dwellings, which are often lower density and built with higher specifications and in prime locations, should be less impacted.
Mr Lawless also recommended that developers should turn their attention to more active sectors like greenfield housing estates, especially while migration rates remain low.
“Greenfield housing estates are also less impacted from reduced NOM, with early reports that the HomeBuilder grant, together with low interest rates and first home buyer incentives, is providing a solid boost to demand,” he said.
With migration levels to remain on the lower side until borders reopen, Mr Lawless said “organic” drivers of housing demand such as the rate of natural increase in the population (births minus deaths), and interstate and intrastate migration are likely to become more important.
He said, however, that the coronavirus pandemic has disrupted both of these drivers of population growth, as the recession might lead to a lower fertility rate, along with the current restrictions on interstate movements, which may be removed sooner than restrictions on international travel.
“Internal migration flows are influenced by a range of factors, but local economic and labour market conditions are key draw cards, as well as lifestyle and housing prices,” Mr Lawless said.
“There are already signs that major regional centres are benefitting from increased demand as some people look to escape the large cities, taking advantage of remote-working opportunities, more affordable housing options and lifestyle considerations.”
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