Immigration a mixed blessing as housing shortfall looms

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A surge in immigration this year has rescued the Australian economy from recession, it has helped alleviate a debilitating shortage of workers and also mitigate the damage wreaked by slow consumer spending on company profits.

Strong immigration offers a handy sugar hit for the economy. But this panacea comes with its own set of challenges.

One only needs to drive through the metropolitan suburbs and see snaking lines of people waiting to inspect rental accommodation to understand the flip side of higher migration – chronic housing shortage and tenants struggling to keep up with rising rents.

What is great for the economy is fast becoming an inequality nightmare.

Melbourne’s population is growing thanks to a return in migration.Credit: Chris Hopkins

The federal government’s soon to be released migration review seems focused on making it easier for companies to bring in workers, so it’s difficult to imagine that the bumper numbers this year will fall over in the next few years.

Immigration projections posted in previous budgets have been unreliable, according to AMP’s Shane Oliver, who notes net immigration for 2023-24 was projected to be 213,000 in the March 2022 budget, 235,000 in the October 2022 budget and 400,000 in the May budget. The reality is this figure now looks like 500,000 or more.

Oliver argues that we need to cut that half-a-million back to about 200,000 to ensure those coming into the country have a place to live.

Competition is tough for tenants looking for a rental in city suburbs.Credit: Chris Hopkins

While the federal government has taken steps to address the issue and has plans to build 240,000 homes a year for the next five years, this won’t fix the shortfall, which Oliver estimates will be 165,000 to 285,000 dwellings by the middle of next year.

State governments have also started to address the housing shortage but the lead times to rectify the problems are long and playing catch-up will be difficult as new immigrants, who tend to settle in the major cities, add to the housing demand.

The private sector built about one million homes over the five years to 2022. And building targets – whether government-mandated or set by private developers – will have to contend with ongoing issues such as the elevated cost of materials, shortage in tradies and a home-building industry beset with a slew of corporate collapses.

We are facing a housing supply and demand imbalance that looks likely to persist for some time. For those in the market to buy, affordability will continue to suffer as the shortage in housing drives up prices.

Oliver quotes from the 2023 Demographia affordability survey, which shows the median multiple of house prices to income for major cities is 8.2 times in Australia versus about five times in the UK and US. In Sydney, it’s 13.3 times, and the percentage of income that is needed to service a loan is heading to record levels. Meanwhile, the time taken to save for a deposit has doubled in less than 30 years.

What many economists don’t dip into is the social dislocation of inequality, which by its nature is harder to measure.

For economists the rising home prices equate to an improvement in the “wealth effect” – this means that homeowners feel richer and more likely to spend when the value of their houses rise. They focus on buoyant immigration being good for gross domestic product, with many pointing out that population growth saved the Australian economy from going backwards in the past two quarters, even as GDP per capita fell.

Meanwhile, investment bank UBS points to the demographic bonus for Australia as migration helps counter the negatives of an ageing population and help “swell Australia’s pension funds assets to $14 trillion by 2050”.

While lower income earners are disproportionately disadvantaged by the rising property market, UBS points out that real estate equities are clear beneficiaries alongside major banks (particularly the Commonwealth Bank), building materials companies such as CSR, travel agencies such as Flight Centre (and presumably Qantas), and a host of discretionary retailers.

UBS reckons only less than half of listed companies are pricing in the earnings related migration bonanza. As for the housing shortage, there’s no quick fix to that.

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