Professor Tulip: Immigration drove nation’s housing shortage

Ex-RBA head of research turned chief economist at the Centre for Independent Studies, Peter Tulip, has provided a submission to the House of Representatives Standing Committee on Tax and Revenue’s inquiry into Housing Affordability and Supply, which admits that the massive increase in immigration from 2005 caused the nation’s purported housing shortage and helped make housing less affordable:

Arguably the largest way in which the federal government affects the housing market is through its immigration policy.

In the mid 2000’s, Australia’s immigration intake accelerated quickly. This resulted in large increases in the demand for housing and hence large increases in housing prices and rents.

Chart 6 reproduces estimates of these effects from Saunders and Tulip (2019, Figure 14). These are based on a detailed model of the Australian housing market that captures the time-series relationships of key variables and allows for feedback between prices and quantities.

Actual population growth, shown in the red line in the top left panel, rose from 1.5% in 2005 to 2.4% in 2008. The blue line shows a counterfactual in which this surge did not occur, with population growth remaining at its 2005 rate. As shown in the top right panel, the surge in immigration boosts the adult population by 650,000 or 3.3% by 2018.

Reflecting historical relationships, Saunders and Tulip estimate that the construction of new housing responds quickly to higher immigration but the stock of housing adjusts slowly. The result was that demand outstripped short-run supply, with the rental vacancy rate falling to a near-record low of 1½% in 2008. This boosted real rents (the bottom left panel) to be 9% higher than they would have been otherwise. The increase in rents gradually flows on to a similar increase in dwelling prices (bottom right).

One point to note about these results is that higher immigration only accounts for a modest fraction of the recent run-up in housing prices, as can be seen in the lower right panel of Chart 6. Saunders and Tulip estimate that lower mortgage rates are a major cause…

Subject to those qualifications, the estimates are substantial. They raise two important issues for housing policy.

1) Immigration policy does not seem to be co-ordinated with other arms of policy. In particular, the recent increase in immigration was not matched by a commensurate increase in housing supply.

2) There is an imbalance in government incentives. The federal government decides immigration rates. However it is the states and local governments that largely have to pay for the extra infrastructure this requires…

Immigration boosts housing prices and needs to be better co-ordinated with housing supply…

The above claims mirror MB’s submission to the same inquiry, which showed how the sharp reduction in immigration owing to COVID has ‘solved’ Australia’s purported housing supply problem:

Any housing shortage pre-COVID was unambiguously caused by the federal government throwing open the immigration floodgates in 2005 (see next chart).

Australia’s net overseas migration (NOM) jumped from an average of 90,500 between 1991 and 2004 to an average of 219,000 between 2005 and 2019 – representing an annual average increase in immigration of 140%.

But now that immigration has collapsed thanks to COVID, Australia’s ‘housing shortage’ has miraculously disappeared (see next chart).

The National Housing Finance & Investment Corporation’s (NHFIC) first flagship report on housing supply and demand came to exactly the same conclusion.

NHFIC forecast that “cumulative new supply is expected to be around 93,000 higher than new demand by 2025”, thanks to the fall in immigration (see next chart)…

The lessons from the above are obvious:

1. Australia’s housing supply ‘problem’ was caused by the massive increase in immigration-driven population growth from 2005.
2. The first best solution to Australia’s housing supply problem is not to return immigration back to its extreme pre-COVID level.

Sadly, all sides of Australian politics are determined to restore ‘Big Australia’ immigration at the earliest opportunity, which will ensure that Australia’s housing supply problems return.

This is evidenced by the latest Intergenerational Report, which projected permanently high NOM of 235,000 from 2025-26 onwards (see next chart)…

Any housing supply problem is first and foremost an excessive immigration problem.

Let’s cut the bullshit. Under the Intergenerational Report’s immigration projections, Australia’s population will balloon by a whopping 13.1 million people (~50%) over the next 40 years to 38.8 million people – equivalent to adding another Sydney, Melbourne and Brisbane to Australia’s existing population.

Such a population deluge will guarantee that housing demand swamps housing supply, resulting in worse affordability (other things equal) and forcing future Australians to live in high-rise slums:

Houses only for the rich

The first rule in public policy formulation should be not to make a problem worse. The planned reboot of the mass immigration ‘Big Australia’ policy clearly violates this rule.