The growing number of international students arriving in Australia is set to be a major boon for the property market. But the long-term benefits of this will be limited to Sydney and Melbourne. The rest of the nation, meanwhile, isn’t likely to see any significant uptick in demand.
Sydney home prices, in particular, stand to gain the most from swelling demand. Melbourne, which has an oversupply of units, isn’t likely to receive the same boost. Yet the wave of student arrivals could help Melbourne overcome its supply glut.
I’ll expand on that shortly. For the moment though I want to bring up another concern.
As demand grows, housing supply may need to increase too. There are growing calls for new apartment builds to help meet the demand from international students. But is that what the housing market really needs?
If the Reserve Bank is anything to go by, it might not be the wisest move. I’ll bring to your attention the RBA’s recent statement on migrants and housing ownership. What the bank had to say was revealing. It explains:
‘Much of the fluctuation in population growth rates over the past decade has been driven by fluctuations in net arrivals of people on student visas.
‘While any net immigration will boost demand for housing, the nature of that demand will depend on the life stage and circumstances of the newly arrived residents.
‘The high fraction of students and former students in the flow of new migrants to Australia implies that the households they form will be younger than average, have lower incomes (at least initially) and be less able to purchase property (without familial assistance) than the average household already resident in Australia.
‘This might result in lower home ownership rates than if migration had been lower or less concentrated in student visa entry. Student migrants will also be more likely to demand housing that is close to universities, city centres and other amenities rather than detached houses on the fringe of cities’.
That tells us quite a bit about what to expect for the property market. As they rightly point, the nature of the demand is as important as the demand itself. If it’s fleeting, or temporary, then it could be counterproductive to invest in new dwellings.
That last sentence is important to note too. International students are acting a lot like investors. By this I mean that they, like investors, are sticking with the two biggest markets. They want to live and study in places like Sydney and Melbourne, not Adelaide. The most renowned universities are in the biggest cities. And they tend to be located centrally.
That explains why 58% of arrivals are settling in one of these two cities.
These are important distinctions when we’re talking about potential housing investment. International students see our housing market in the same way that investors do.
The national market, as a whole, doesn’t need any substantial increase in apartment supply. Neither does Melbourne for that matter. The only city then that really stands to benefit from any major investment in Sydney.
A tale of two cities
As mentioned, Melbourne has an oversupply of units, while Sydney’s market is undersupplied. In Sydney, you have the perfect combination of high demand to go with scarcity of supply.
These varying market conditions give us some clues as to the future direction of home prices.
It means prices in Sydney could face upward pressure on the back of growing student arrivals. Specifically, prices should be most affected in the downtown core, where students typically prefer to live.
At the same time, it’s not altogether clear how many students are actually renting. It’s important to remember that a significant number of those studying are arriving from China. We can’t discount the possibility that some percentage of them are lodging in dwellings purchased by their parents.
But for arguments sake, let’s assume that’s not the case. Let’s say that they’re all potential buyers and renters. What impact does that leave on the market then?
While Sydney has a shortage of units, the same can’t be said of Melbourne. Existing home-owners already fret about the potential effects of oversupply on home valuations.
That’s an important point of difference because most students seek low cost accommodation.
International students typically don’t set out to buy houses from the outset. The lack of affordability more or less guarantees that. It’s fair to say then that, in all likelihood, they’re opting to rent instead.
They’re renting units because they’re cheaper, and because they tend to be located more centrally.
We can glean two things from this.
Firstly, it indicates Sydney home prices stand to gain most from student migration. That’s especially true for Sydney’s central core, where demand is highest. Any new apartment construction should ideally limit itself to Sydney’s inner core.
The harbour city still has capacity to increase supply without dragging down prices in the broader market. At the same time, it could help increase affordability for first time buyers, which wouldn’t go amiss either.
Secondly, international students could help Melbourne reduce its problem with unit oversupply. They can help fill the gaps in the market without needing new supply. That could also help existing homeowners, as prices rise in line with falling supply.
Last year, Sydney attracted 10,000 more students than Melbourne. There is room for Melbourne to close this gap. It can use its existing oversupply of units to offer cheaper accommodation compared to Sydney.
Of course, this also depends on where students are choosing to study. That’s not something rental prices alone can influence.
Australian education industry as an answer to mining woes
Australia’s education industry is targeted as a key non-mining export for Aussie economy. In fact, the overall service sector already tops iron ore as the nation’s biggest export.
Foreign students are an increasingly important part of the Aussie economy. The number of students is rising quickly. The rate is expected to surpass the record set in 2009. It’s expected that migration will reach 120,000 in two years, and continue to accelerate beyond that.
Keeping these arrivals in the country is part of the government’s long term plan. That’s why rules are being relaxed to make it easier for students to remain in Australia following graduation.
The growth of non-mining sectors like education is the kind of development the economy is pinning its future hopes on. Our reliance on mining exports will need to decrease as a share of total output. And it’ll have to do so if we’re to avoid a hard landing in the future.
Contributor, The Daily Reckoning
PS: The Aussie property market is still growing. It may be a two-speed market, but the majority of capital cities are still growing. The Daily Reckoning’s property expert, Phillip J. Anderson, is bullish on the market’s future.
Phil says that the national housing market is only set to continue growing. He says that Aussie real estate will boom for the next decade.
Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He correctly predicted the 2008 housing market crash. He also went against the trend in 2009, saying that house prices would go on to boom this decade.
He was right on both accounts.
In his latest free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.