The impact of international socio-economic trends on the Australian property market

The impact of international socio-economic trends on the Australian property market

May 15, 2023 | by DiJones

With so many international economic and cultural ties in our globalised society, it’s no surprise that events on the world stage can have significant effects on our own economy and, by extension, on our property markets, as we have recently experienced in full technicolour during the pandemic years and throughout the conflict in Ukraine.

As we navigate this current period of global inflation and the post-pandemic return to open borders, there are two key factors that are likely to have the greatest impact on our property markets: global economic trends and increased migration.

Although we shy away from the crystal ball and making concrete predictions, especially given the climate of uncertainty, we think it’s important to take stock of what is happening around us and consider how international factors could affect our markets throughout the rest of 2023.

Global economic trends

Last year saw inflation spiralling upward in economies across the world as post-pandemic demand, supply-chain disruptions, and commodity prices rose beyond expectations. To counter inflationary pressures, many central banks entered a phase of aggressive interest rate hikes to contain inflation and get it back down to target levels. Australia was no exception, although our cash rate, currently at 3.85%, is relatively low compared to past spikes and current rates in other countries (for example, in the US, where the Fed has just pushed rates to 5.25%, to say nothing of the terrifying 81% cash rate in beleaguered Argentina).1

While it takes time for the full impact of any changes in monetary policy to be felt, we have seen global inflation declining slowly, although the International Monetary Fund (IMF) has expressed concern that “[i]nflation is much stickier than anticipated,” and core inflation rates remain high in many countries while their labour markets remain tight.2 This suggests that further monetary tightening may be necessary to reach sustainable targets. However, our own Reserve Bank (RBA) held the cash rate steady at 3.6% at their April meeting, and although we have since seen a 25-point rise and may still see another small rise in coming months, the April decision heralded the possibility that our own economy may be set to stabilise sooner rather than later.

In fact, the chief economist of the Commonwealth Bank (CBA) has suggested that the RBA may need to consider lowering interest rates towards the end of 2023 to counter deflation and rising unemployment.

Lower interest rates and a hint of economic stabilisation are indications that Australia is faring better than many other countries in this global downturn. Treasurer Jim Chalmers pointed out in an interview with the ABC that our country is better positioned than many to face the “pressures that are coming at us from around the world” with low unemployment, strong export pricing, beginnings of wages growth and well-regulated banks.3

Together with our healthy reputation for strong capital growth over time and current high rental returns, this underlying strength could prove attractive to cashed-up international property investors looking for solid opportunities.

Increasing migration

Another important trend that will impact our property market is the increased rates of migration that we have been seeing since our borders reopened.

In September last year, acute labour shortages prompted the Australian government to increase the number of permanent migration visas to 195,000 for 2022-23. Of these, 142,500 are allocated to skilled workers, who participate in the workforce and contribute to the economy.4

We are also seeing the return of around 40,000 Chinese students as the end of their country’s zero-COVID policy allows them to travel again, and online learning programs are no longer recognised by the Chinese authorities.5

As things stand, this influx of migrants and international students is expected to put additional pressure on our already very tight rental markets, which are currently recording record-low vacancy rates and rapidly rising rents, a situation which is not expected to ease any time soon.

However, while the rental market will be the first to register the impact of increased migration, in time, many of these new residents will choose to purchase a home, and the subsequent increase in demand is expected to stimulate the wider property market.

In addition, investors may be lured back to the market by the promise of several years of healthy rental yields to mitigate any additional costs associated with financing their investment.

The promise of balance?

While much of our attention is focused on interest rates and inflation, there are other factors that drive the real estate market, including the strength of the labour market and supply and demand.

We’ve seen that Australia’s labour market remains quite strong and is set to be bolstered by a wave of skilled workers coming into the country.

In terms of supply and demand, we’ve seen that since the downturn began, many vendors have been holding onto their properties, waiting for market conditions to improve before selling. This, combined with slowing construction due to increased costs that were a consequence of the global commodity and shipping pressures, has meant low overall supply.

Over time, demand will increase, driven by migration and slow but steady economic recovery. Higher demand coupled with current low supply will inevitably start to push prices up, and as prices rise, more vendors may be encouraged to list their properties and developers may once again be prepared to undertake more projects to boost housing supply. If this happens, we may well start to see a more balanced market emerging, which will auger well for our markets and the wider national economy.

Rounding up

Australia, like most countries, continues to face economic challenges in these times of uncertainty. In their World Economic Outlook, the IMF has forecast slow growth for our country in the next two years – 1.6% and 1.7%, respectively – but, unlike the UK or Germany, whose economies are expected to shrink this year, we are still moving forward.

Our property markets have gone through a period of downturn in response to global pressures and national monetary policy. While global economic trends will continue to have a slowing effect on our national economy, increased migration and forecasts of inflation in Australia beginning to decline until it reaches “around 3 per cent by mid-2025”6 mean that we are already seeing home values stabilising and the market beginning its journey towards the next phase of the property cycle.

Unfortunately, there is no crystal ball, but if things continue on their current path, we can hope to see our markets shifting towards stability and growth in the next year.

1. 2. International Monetary Fund. April 2023. World Economic Outlook: A Rocky Recovery 3. 4. 5.,in%20the%20next%20few%20months. 6. RBA Statement on Monetary Policy. February 2023.
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