Are overseas migrants really to blame for high housing costs?

Overseas migration to Australia has reached record highs, making it a hot topic as the Federal Government releases its new migration strategy and housing affordability continues to deteriorate. According to the ABS, net overseas migration reached 518,000 for the year to June, compared with a pre-COVID decade average of 217,000.

As the migration discussion ramps up, it is important to return to the data to understand what impact overseas migration actually has on the housing market. Going from an extremely low intake of migrants, to record highs post-pandemic, has made this easier to identify.

Changes in overseas migration affect rents in the short term

Despite record levels of migration in 2023, residential property transactions fell -7.6 per cent this year. The number of homes sold in the year to November was 479,477, which is below the decade average of 487,978. Annual sales volumes peaked in the 2021 calendar year, when Australian borders were closed, and interest rates were at record lows.

One of the reasons high net overseas migration to Australia has not resulted in sales rising is that migrants are largely renters when they first come to Australia. ABS analysis showed in 2021 around 62 per cent of recent permanent migrants were renters (where they had been in the country for five years or less). For migrants who have been in the country for more than 10 years, that rate falls to 30 per cent, suggesting permanent migrants have transitioned to home ownership.

Rent values were on the rise well before Australia ended COVID-related travel restrictions. Between March 2020 and July 2022, when international travel to Australia was restricted, rent values increased by 16.4 per cent. During this time, increases were driven by a reduction in the average number of people living in a dwelling, as renters “spread out” across the market.

High government stimulus payments boosted income, which added to housing demand and people choosing to rent a place on their own. The RBA estimates adjustments in household size added to dwelling demand by around 120,000 properties.

Since border restrictions were lifted in July 2022, rent values across Australia increased by a further 11.1 per cent. The surge in migration has contributed to this increase. Assuming an average household size of 2.5 people per dwelling, net overseas migration for the year to June would account for dwelling demand of 207,234 (dwelling completions were about 175,000 in the same period).

This is not even considering all the new households that form domestically (for example, when a young person moves out of the family home). The national rental vacancy rate reduced to a record low 1.1 per cent in November, and the median weekly rent value estimate from CoreLogic is now $595 per week.

Some of the biggest increases in rents since July 2022 have been in areas that are popular with overseas migrants. Migration data from the ABS shows the highest volume of net overseas migration to Australia is usually South East Melbourne. Between 2016 and 2022, this region saw net overseas migration averaging about 10,000 per year.

Other areas with high annual net overseas migration include the Melbourne’s Inner region, and Sydney’s Inner South West and Parramatta. Each of these areas have seen a strong increase in rent values since July 2022, averaging 18 per cent. The chart below shows the areas with high exposure to overseas migration have generally seen higher growth in rents since July last year.

While high-migration areas are seeing big rent increases now, they have not seen the biggest increases since the pandemic overall. Melbourne’s South East, for example, saw rents rise by 26.7 per cent since March 2020, which is lower than the national rent value increase since the start of the pandemic overall (29.2 per cent).

The strong response in the rental market to overseas migration has led some to suggest a temporary cap on arrivals, in order to catch up on housing supply. But migration was capped during the pandemic. This created more demand challenges when travel restrictions lifted, because the bounce back in arrivals was so rapid, while increased housing supply takes time to be delivered – especially while interest rates and construction costs are relatively high. Many inner urban markets actually saw a decline in rents at the onset of the pandemic, which may have deterred investment purchases.

Skilled migration can even help to take some of the heat out of the market, by filling construction skills shortages. A greater focus on skilled migration is a core part of the Federal Government’s migration strategy, and the WA Government this year announced a grant of up to $10,000 for the settlement of skilled migrants in construction to boost dwelling completions.

Overall, there are many different factors that contribute to increased home values, and fluctuations in domestic demand can have just as much impact as overseas migration.