Lower immigration doesn't necessarily mean lower property prices

This week Liberal Opposition Leader Angus Taylor vowed to slash immigration to Australia.

He’s promising to cut net overseas migration to 100,000 per annum, where it’s recently been close to 500,000 per annum. He’s going to cut temporary visa holders by 650,000 over four years, halve the humanitarian intake to 10,000 and cap international students at 240,000 per annum. All of which means population growth, if he’s elected, will slow significantly.

Real estate investors might think this is just more bad news in this annus horribilus of real estate years. It isn’t necessarily, and here’s why.

First, think about some of the very high value and high price growth markets where population growth is at best mild, or even stagnant.

My mind goes to Noosa in Queensland, notorious for its activist nimby no-growth ‘leave it as it is’ local politics. This is the region that proudly talks population caps. The region is growing at a runaway (in their mind) 0.9 per cent within a south east Queensland region where parts of which have been growing at 4 per cent or more.

Yet Noosa’s real estate markets have hardly suffered as a result of lower population growth, while some of the higher population growth markets in southeast Queensland have not grown as strongly.

The difference is scarcity and desirability. Noosa is a hotly contested market by people with lots of money. New supply is constrained, and the population is barely growing but that doesn’t matter if real estate value is your performance metric.

Of course, Noosa’s markets may slump with the rest of the country as investors bail out and high net worths get even more anxious about which of their trusts will be left after the Federal Government’s policy work is done (I picture Jim Chalmers as a Viking), but lack of population growth won’t be the driver.

Quality markets in demand can thrive without population growth underpinning them.

Another consideration is household formation.

Think of a region of one million people. At the current 2.5 persons per dwelling, that’s equivalent to roughly 400,000 dwellings (not allowing for vacancies). Keep in mind that a hundred years ago that number was four people per dwelling (and the dwellings were smaller!), and even as recently as the 1980s it was three.

So a hundred years ago one million people needed just 250,000 dwellings, and 50 years ago one million people needed 333,000 dwellings. They now need 400,000.

And household size is likely to shrink further if kids can ever be convinced to leave home. And because housing is so expensive, we are evidently having fewer kids (after all, having the house is more important than having children, right?).

If household sizes shrink to 2.1 people per dwelling as some are predicting, that’s 476,000 dwellings, or an extra 76,000 dwellings simply due to a change in household formation. Nothing to do with population growth at all.

Building barriers

Then there’s our construction industry.

The universal lament among building contractors is that it is now more complicated, takes longer, and costs more to build a thing – any ‘thing’ - than even just 20 years ago. In those ‘good old days’ the Building Code of Australia only numbered around 300 pages. It’s now more than 2,000.

“We’re from the government and we’re here to help,” truly are the most frightening words in the English language.

Combined with the world’s most expensive energy markets (which feeds into the cost of everything from steel and cement to transport), building costs are continuing to rise.

This isn’t a question of demand, but of rising input costs. Meaning if it cost $800,000 to build a new two-bed apartment a few years and it now costs $1.2 million, and the forecast is for another 5 per cent escalation in the few years ahead, guess what? Not only will the cost of each new housing unit increase, but the replacement costs of existing stock will likely see their prices rise with it.

You don’t see many $500,000 second-hand home units of good quality in a market where the new stock is priced well over $1 million. Once again, nothing to do with population growth.

Translating Texan

The icing on the cake is our lamentable supply record.

We just can’t build enough of anything fast enough to keep up with demand.

Rigor mortis can’t be far away. Even tepid population growth in an inelastic and unresponsive market will see prices rise. The proof is found in cities like Austin, Texas, which have experienced rapid population growth but prices have stayed stable because their supply side is absolutely humming.

They rode their bureaucrats out of town a long time ago, and don’t want them back. This is a city whose population has grown at near 3 per cent per annum compound, yet prices are still around five times incomes and remain stable.

In this case, population growth, even when rollicking along, is not necessarily correlated to prices.

So before you turn to hard liquor to drown more sorrows on account of moderating population growth, think of the upside.

It’s there, somewhere. You just need to look hard enough.