Immigration Slump to Weigh Heavily on Australian House Prices

So far, Canadian housing prices continue to defy gravity despite the decline in immigration arrivals:

Fitch Ratings-Hong Kong/Sydney-21 September 2020: Australia’s house prices are set to decline by 5%-10% over the next 12 to 18 months, as net immigration weakens sharply, says Fitch Ratings. Price declines on this scale would be unlikely to have a ratings impact on Fitch-rated residential mortgage-backed security (RMBS) transactions, but the evolution of the coronavirus pandemic may create risks that will require close monitoring.

Immigration had already been slowing prior to the outbreak of the pandemic, but has plunged since the health crisis led to strict controls on international travel. The Australian government in May predicted that immigration would fall by 15% in the year to June 2020 (FY20) and by a further 85% in FY21. This would represent a fall of almost 200,000 permanent arrivals in FY21 relative to FY19, and mark the lowest level of net immigration since June 1993.

The decline will lead to a significant drop in household formation. The most recent Australian Census, held in August 2016, showed that the average Australian household had 2.6 people. If this ratio holds for immigrants, the reduction in immigration between FY19 and FY21 would imply demand for around 76,000 fewer dwellings than would have otherwise been the case. Assuming the natural population increase remains similar to previous years, Fitch estimates the population growth for Australia will reach just 0.7% in 2020, a level not seen in the past 40 years, and down from 1.4% in 2019.

Previous recessions in Australia that were coupled with significant unemployment resulted in a reduction in household formation as fewer adult children moved to their own dwellings. The exceptional uncertainty related to the current recession, and its disproportionate impact on young people, is likely to reduce household formation and property demand even more.

The Australian Bureau of Statistics has indicated that 171,000 housing approvals were granted in FY20. This is significantly down on the peak for approvals of 243,000 in the 12 months to August 2016, which may help to mitigate the demand shock. Monetary policy has also loosened, which could provide some support for house prices, as could government policies targeting support for the housing sector.

Nevertheless, we believe house prices will face downward pressure nationwide, as supportive factors will be outweighed by the impact of the change in net immigration, along with high unemployment and general economic uncertainty. Indeed, risks to our forecast for house prices are skewed to the downside, and price falls could exceed 10% if our assumptions about the path of the pandemic prove to be overly optimistic.

Fitch modelling for RMBS transactions addresses risks to house prices associated with the impact of the pandemic. Our stress analysis at ‘Bsf’ includes market value declines of at least 25%, so the 5%-10% drop in prices we expect should not have significant effects on ratings. Nevertheless, price declines will vary between regions, and transactions that have collateral concentrated on inner city units in Sydney and Melbourne may be more affected. Moreover, we remain alert to the potential for downside risks associated with the pandemic’s evolution, and will continue to monitor trends in the housing market closely.

Fitch estimates that immigration into Australia has added approximately 1% to GDP annually over the past 10 years. An end to pandemic-related travel restrictions could result in a rapid reversion of immigration to previous trends, and we expect new permanent arrivals to remain a driver of medium-term growth. However, we do not expect restrictions to be eased until well into 2021, and there may be public pressure on the authorities to limit immigration in the near term as long as unemployment remains high.

Source: Immigration Slump to Weigh Heavily on Australian House Prices

About Andrew
Andrew blogs and tweets public policy issues, particularly the relationship between the political and bureaucratic levels, citizenship and multiculturalism. His latest book, Policy Arrogance or Innocent Bias, recounts his experience as a senior public servant in this area.

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