Migration the x-factor that could continue driving property prices

Over the next few years Australia will allow overseas migration to the tune of more than 200,000 people a year.

That influx of people will drive demand for housing, with roughly 70,000 to 100,000 houses needed every year to house those 200,000 migrants.

From an affordability perspective that creates a massive challenge.

The property market nationally goes up and down in value depending on the overall economy. Within Australia there are multiple different markets that operate on their own cycles and grow at faster or slower rates at certain times.

The reason some markets grow faster than others can usually be attributed to a range of factors, with the biggest “x-factor” being net overseas migration.

Since the pandemic started, Australia has barely built 70,000 new dwellings yet we are going to need to build a minimum of that every year just to keep up with the demand over the next two to three years.

Adding to that challenge is the 1 per cent vacancy rate across Australia: the lowest since 2006. That lack of supply is the reason rents in most capital cities have increased by 5 per cent to 10 per cent a year.

Traditionally the markets that have benefited the most from overseas migration have been Sydney and Melbourne, but it also has flow-on effects for the smaller capital cities like Brisbane, Adelaide and Perth that pick up the bulk of interstate migration. In short, all markets are winners when it comes to net overseas migration.

A surge in demand and lack of supply only leads to one outcome – rents and values increasing.

Another significant variable is the announcement of the 2032 Olympic Games in Brisbane that will cement the city as a world-class destination and create a huge amount of infrastructure investment in the lead-up.

That spending on infrastructure is important because it creates jobs, improves amenity and ensures the city is capable of handling population growth. This will not only place Brisbane as a key beneficiary from a population growth perspective for interstate migrants, but also potentially future overseas migration, where it hasn’t traditionally been a big player.

For perspective, the Sydney median house price doubled between 1998 and 2003 in the lead up to and immediately following the 2000 Olympic Games.

The final x-factor is the fact the three fastest growing employment industries in Australia over the coming decade will be health, education and renewable energy. Cities with good exposure to those industries are best positioned to generate and manage population growth.

Adelaide at forefront

In this respect Adelaide sits front and centre as the city with the newest and most expensive hospital in Australia and is a leader for renewable energy technology and investment. Because of its positioning around jobs in healthcare and renewable energy, Adelaide house price rises could potentially reach as close as 78 per cent of the Sydney median house price, taking it to nearly $1,100,000 in the next 10 years.

It has only done that once in recent history; during the mid-eighties off the back of a manufacturing job boom.

The property market in Australia is not homogenous. If you look at the capital cities over the past 50 years, each of those has experienced different periods of growth at different times.

In the industry we consider a growth cycle to be when property values increase by 10 per cent or more for two or more years in a row.

Between 1998 and 2003 the Sydney and Melbourne markets were well and truly in a growth phase, with medians up by 100 per cent and 111 per cent respectively.

From 2002 to 2008 the Brisbane and Adelaide markets took over, growing by 163 per cent and 170 per cent respectively.

The Perth market is a little bit different because it tends to operate on its own cycle independent of the other markets, but likewise has strong periods of growth when the mining sectors are going through big construction phases. It experienced growth between 2002 and 2007 of 140 per cent.

The Sydney barometer

In the past, Sydney and to a lesser extent Melbourne received most net overseas migration, which is the main contributor to Australia’s population growth and demand for housing.

Over time that makes the market less affordable and more congested, causing buyers to look for other markets that are more affordable and offer a better lifestyle and amenity. That’s when the other capital cities, Melbourne, Brisbane, Adelaide and Perth, become more appealing to buyers and demand and prices begin to increase there.

As a benchmark we usually consider a capital city’s property values as a percentage of the Sydney median house price.

For example, the Melbourne median house price today sits at 71 per cent of the Sydney median house price. Back in 2010 it got as high as 90 per cent.

The Brisbane median house price is currently 61 per cent of the Sydney median house price, whereas in 2008 it was 78 per cent.

The Adelaide median house price now sits at 47 per cent of the Sydney median house price and was as high as 71 per cent in 2011.

Perth’s median house price was as high as 85 per cent of the Sydney median house price, but it is less predictable because it has a lot more to do with what is happening inside the Perth market as opposed to the market more generally.