Explainer: How Australia's slowing population growth will affect property markets

Australia’s population growth will grind to a near halt for the next two years because of coronavirus border closures, which is expected to smash GDP, the economy and harm property markets.

Budget documents reveal the federal government expects the rate of growth to fall from 1.2 per cent last financial year to 0.2 per cent this year, and then 0.4 per cent next year — the slowest growth in a century.

The sudden loss of international migration has already hit the economy and property markets across the country, with low-cost, investor-class housing losing value as international students and new arrivals disappeared nearly overnight.

What does this mean for the wider property market now and into the future?

First, what are the numbers?

The 1 percentage point fall from 1.2 per cent to 0.2 per cent is mostly due to a drop in international arrivals.

AMP Capital chief economist Shane Oliver said the drop was so large that births were barely offsetting the shortfall.

“Population growth usually sits at about 1.7 per cent. About two-thirds of that are from immigration and the rest is from natural growth,” the respected economist said. “Usually we see about 240,000 net immigrants coming here each year. This year the government is forecasting that to be negative 70,000.

“That’s a loss of 300,000 relative to what we normally get. But if you’ve got a huge collapse in immigration, it’s largely offsetting any natural growth in the population.”

Why is that bad?

There are a few reasons. Demographer Simon Kuestenmacher and Dr Oliver agree three major issues are at stake. The country’s GDP will be lower, the workforce will shed middle-class jobs which will weaken the economy, and property markets will take a hit.

While GDP isn’t a direct measure of how life is for most Australians, its growth has been almost directly linked to the amount of value new members of the workforce bring to the economy, as they are consumers and produce value for their employers.

Most of this growth in the workforce has come from immigrants for some time.

“The simple thing is everyone who has a job creates money for the country and creates GDP,” data-interpretation expert Mr Kuestenmacher said. “In the past couple of decades Australia used migration-based population growth to amp up GDP.

“It worked like a charm and it will once COVID is over.”

How does that affect the economy?

The economy, in part, relies on a steady stream of workers to continue growing. As they produce more, GDP goes up.

The challenge presented by losing all international migration is not just the number of workers, but also the jobs they do.

Mr Kuestenmacher is concerned the country’s middle class could shrink further without skilled workers.

“Australia used to have 30 per cent in the middle-skilled jobs in the 1960s. Now this is down to 13 per cent,” he said. “We are shrinking them away. We then need to upskill our existing workforce because we’re not taking in migrants.”

Mr Kuestenmacher praised the Morrison government’s budget for its focus on supporting the construction sector, as this would keep these middle-skilled positions open. However he said Australians needed to be able to reskill into the work if necessary.

“TAFEs must be free,” Mr Kuestenmacher said. “They’re the most important vehicle to get low-skilled people into middle-skill jobs.”

Dr Oliver agreed this was an issue and said the loss of the middle class was making both society and the economy less resistant to external shocks like pandemics.

“If you take away migrants the economy will lose that dynamism,” he said. “[The loss of the middle class] contributes to fragility in society. The middle class is a positive in many Western countries. It’s quite stable.

“These people are comfortable and they just want to go on with their lives and raise their children, but now they’re falling out on the low end.”

The construction sector may be supported for now, Dr Oliver said, but may take a hit as reduced demand for homes from new arrivals takes the wind out of the new-builds market – although that may take some time to set in.

“The sector that would be most hit by that will be the housing sector. Every year we need around 175,000 dwellings … to satisfy underlying demand,” he said. “It’s driven by people already in Australia leaving the family home and starting their own home or it could be an immigrant coming to Australia.

“[The loss of immigration] reduces underlying demand by about 100,000 a year, roughly speaking.

“If the norm is we need 175,000, we’ll only need 75,000.”

Mr Oliver said this would have a knock-on effect on other sectors.

“It means less housing construction, less property transactions, which is bad for agents, less people moving so moving companies will be hit and less demand for things that go into houses like carpets, paint, TVs, et cetera.”

What about the property market?

“The lack of immigration in the next couple of years will definitely impact property,” The Agency chief executive Matt Lahood said. “That’s definitely going to hurt the real estate sector.”

The boss of The Agency, which has offices in NSW, Victoria, Queensland and Western Australia, said it would be off-the-plan apartments and rentals that would be hit at first.

“It relies heavily on overseas students, people coming in, people who then rent first before they buy,” he said. “We’re going to lose that.”

Mr Lahood expects the existing home market in middle suburbia would not see price falls, providing the malaise at the bottom of the market didn’t set in.

“A lot of people [who are buying now] sold their properties in December last year and January and February,” he said. “A lot of our buyers at the moment are people who couldn’t find anything in March, April, June.

“That’s the reason the market’s been held up … we won’t see the effect of immigration in the next few years or so.”

Mr Lahood said the concessions for first-home buyers would prevent prices of investor-class housing falling too far because the extended scheme is restricted to new homes.

“Having the first-home loan scheme targeted at younger people will put a floor under the market for the next couple of years,” he said.

Dr Oliver said while the markets for existing and new houses were currently supported by pent-up demand and government stimulus respectively, a reckoning could come for both.

“That chain of events has now been disrupted. It will initially show up in units, but it will eventually show up in houses,” he said. “It’s [dictated by] demand for dwellings, and this year the demand will be about 100,000 lower.

“Things are happening now, but there is a freight train which is coming down the track.”

Which cities will be hit the worst?

Mr Lahood said Sydney and Melbourne were the most exposed, and would bear the brunt.

“Melbourne is heavily targeted with rentals, same with the eastern suburbs in Sydney,” he said. “And then obviously the uni accommodation they have there as well. They’re not going to be seeing students.”

Dr Oliver said the issues in the student and rental-heavy areas could spread if left unchecked, but for now areas that were skewed to owner occupiers would be safe.

Mr Lahood said holiday locations on the Sunshine and Gold Coasts may also take a hit, in part because of the closed internal borders.

Other areas of the country – Perth, Adelaide, Canberra and the rest – would be largely unaffected for the time being, he said.

In Perth and Darwin, house prices were emerging from years of falls and stagnation and momentum was insulating the local markets from shocks.

Canberra was protected by its perennial public service sector, he said.