Rental market woes in the wake of Coronavirus – the other side

With Australia’s borders effectively all but closed right now there will be a surge of Airbnb and other short-term lets hitting the rental market, including many furnished lets.

Rent Much of this accommodation is by its nature far more suitable for students or short-stay tourists than it is for families or young professionals, but in aggregate this will surely dampen the rental market in 2020.

Temporary visa issuance is evidently set to fall sharply from the record highs seen in the 2019 figures.

As is often the case in economics, there are some counter-balancing factors which will pull in the other direction by 2021, which in no particular order include:

1. A boom in staycations

As an increasingly wealthy nation Australia has since 2008 seen many more short-term departures than arrivals, as Aussies enjoyed a stronger currency through the mining boom and embraced the opportunity to see the world.

In the 2017 financial year short-term Aussie departures hit a record 10 million for the first time, comfortably exceeding the 8.6 million short-term arrivals.

A1

While we’ll see very little inbound tourism this year, we also won’t be losing all of these Aussies overseas, and over the coming months there will gradually be more domestic travel allowed.

To take a personal example, my 2020 New Years’s resolution was to learn Italian as I was hoping to take my young family and father-in-law to live in Italy for a while later in the year.

Obviously this is the last thing on my agenda right now given that Queensland has all but eliminated new confirmed cases of COVID-19, while in Italy there have been 176,000 confirmed cases at the time of writing, as well over 23,000 deaths.

‘Questo non è buono.’

2. Household formation pyramid

Australia has seen very strong inbound numbers from net overseas migration in recent years, which will hit a sudden stop in Q2 2020.

Nevertheless, the natural growth of the population (birth minus deaths) will still see a natural increase of about +150,000 per annum.

Moreover, immigration patterns over the past decade have led to a unique situation in Australia’s history, with millions of young Australians now moving into the household formation age.

A2

Of course, household formation itself will be very challenging over the coming weeks given the present restrictions on movement, but eventually Aussies will return to work and the young renter cohort will come into the rental market in their hundreds of thousands.

3. The Australian diaspora: returning citizens

At any one time there might be around 1 million Australians living or working overseas.

Of the Australian diaspora – the several hundred thousand citizens living overseas – about half tend to be in Europe, and about a quarter in Asia.

Inbound flights are tough to come by at the moment, but already Aussies are returning in their thousands, many of them via South Australia and an enforced period in quarantine.

These figures will likely only increase given how few ICU cases there are in Australia (at the time of writing having fallen to just 49, versus a planned expanded capacity of 7,000).

4. Safe space: the gradual return of free movement

While the impacts of COVID-19 will be felt for years to come, eventually some level of normality will return to everyday life, and when that happens two countries will likely emerge as perceived safe and desirable places to be.

Miniature Traveler Man On The Terrestrial GlobeNamely these are New Zealand and Australia, where the spread of the Coronavirus has to date been far more successfully contained than elsewhere.

Again, to take my own case, I have a European passport and often spend several months of the year overseas.

But the situations unfolding in the UK, Spain, Italy, France, Germany, Belgium, Turkey, and elsewhere certainly don’t give rise to a burning desire to be anywhere other than Australia right now.

Migration will naturally flow towards countries such as Australia and New Zealand where we’ve seen enormously favourable results compared to the US, Europe, and many parts of Asia.

The demand for migration to Australia will rise to unprecedented levels as and when the current crisis recedes, even allowing for a spike in unemployment in 2020, while back home Aussies will be more inclined to stay pat as well.

5. Net additions to rental supply drying up

Housing starts are drying up, a trend which we can see happening before our eyes in real time.

The rate of dwelling commencements is expected to hit the lowest level since at least 1960 over the coming months, and probably much lower.

Moreover, there are simply fewer landlords in the market now, as tends to happen during periods of economic shocks, such as from 2007 to 2009 (which eventually gave rise to a chronic rental shortage, especially in Sydney).

6. Vested interest

Finally, don’t underestimate the power of vested interest.

Tourism AustraliaThe previously thriving tourism sector is dying on its feet right now, and Australia’s universities – having gone ‘all in’ on the international student gold mine – will be hurting badly, and pushing very hard for the return of international students as soon as possible.

In the first instance the tourism sector will look towards New Zealand as a key source of arrivals, NZ having long been the number one country for short-term arrivals before China hit the top spot.

The sheer weight of pressure to find ways to get such sectors moving again will likely see the government finding ways to relax restrictions sooner than many believe possible at this point in time.

Modern economies aren’t built to be shut down, and I expect to see the COVID-19 narrative shift sharply over the coming few weeks towards the exit strategy and the need for a return to normality.

The wrap

None of this is to downplay the significance of the short-term hit to migration flows and the inevitable knock-on impact to the rental markets.

But this post is simply to point out that there will be some counter-balancing factors pulling in the opposite direction over time, especially given the comparatively remarkable containment of COVID-19 in the Antipodes (so far).

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Pete Wargent

About

Pete is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. Using a long term approach to building businesses, investing in equities, & owning a portfolio he achieved financial independence at the age of 33. Visit his blog


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