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:

Sydney dwelling composition

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.

Unconventional Economist
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Comments

  1. The two major parties have made it quite clear that they do not care about young Australians. The LNP only cares about big business and post government positions for themselves (the jobseeker debacle should have them in shackles) and the ALP is too woke for its own good (caring more for non-Australians than our own). And the mainstream media is the useful idiot that purports we all want to live in highrise ghettos or tiny homes… bring on the rise of independents and minor parties for want of a step change in our political system!

  2. Just a hole in your story Leith. Immigration has Stopped the last 18 months and housing has still gone up. Immigration must affect housing prices put it seems the issue is dwafted by money supply and interest rates.

    • No shit Col. Easy money trumps everything – as explicitly noted in Professor Tulip’s research and literally hundreds of articles on this site. Immigration is a secondary factor on prices, but a primary factor with respect to living standards.

      My whole contention is that the whole supply-side story is bullshit. It’s an excessive immigration story. Yet our policy makers continue to blame ‘supply’ while keeping the immigration floodgates wide open.

      It’s cognitive dissonance and policy dishonesty on a grand scale.

    • Our population growth has momentum ie we will keep growing for quite awhile without immigration. And it’s more a long term effect on house prices. The low interest rates/ easy money explains the recent price rises. But this could change quickly if interest rate rise or the government makes lending tougher.

      • Display NameMEMBER

        With the multiples of debt to income that are and have been loaned in Australia, interest rates cannot go up substantially for decades without a housing collapse. I suspect hopes of inflating the debt away are wishful thinking. We are now at a point where there are no good solutions. So the government, and the regulatory bodies just kick the can down the road. It is the “not on my watch” approach

        When your four major banks are ~25% of the ASX 200 by capitalisation and their loan book is made up of ~65-70% residential mortgages, any substantial decline in house prices, say 30% bins the banks. And don’t tell me 30% to 40% is not possible. How many years of gains is that? Not many. And the prices are based around easy credit and BS lending standards, not “fundamentals” as the spruikers would argue.

        Many countries find them selves in a similar situation but Australia particularly stands out as there was no debt adjustment during the GFC, we just doubled down. The nearest OECD country whose banking system is as exposed to residential mortgages as Australia is Norway I believe at a bit over 40%. and as far as I am aware, nowhere do so few banks so dominate the financial landscape of a country. And this is why all parties, political and regulatory have no interest in doing anything about “housing affordability”. Not on their watch…

        • They have already used macroprudential regulations to cool the housing market – they don’t have to raise interest rates. They are only so low now because of the Covid crisis and the need to support the economy.

      • Only several years momentum left when baby boomer ‘bubble’ is transitioning into retirement, while the top end including pre/WWII oldies depart; mother lode of change in the permanent population to be followed by those of lower fertility.

    • What’s the lag between arriving and buying a house for the non-minted Jimmy Grant? No doubt lots of temp visa types already into the country move up the jobs food chain and progress to permanent residency over the course of the pandemic.

    • This will be the biggest tragedy of this whole thing.
      The fact that there was so much momentum already and so much money has been thrown at it that prices don’t fall from an 18 month reprieve so people can say “see it’s not migration that was increasing prices!”.
      As if this is anything remotely like what it would really be like if we decided to ditch this mass migration insanity.

      Australia’s population has naturally stabilized into a sustainable 24ish million. Without mass migration we wont need to build any more highrises or subdivide any more city fringe farms….because everyone will have a house already. There is no population growth. So our massively bloated construction sector which has scaled up (to attempt) to service the ponzi will need to downsize radically….

      China gone. Population growf gone. Construction sector gone. How are house prices going now??

      The stimulus wad has been blown. It’s ALL migration from here on.

  3. Lord DudleyMEMBER

    “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”

    Yes, this is the goal of the policies of the last 20 years at all level of government. Housing cannot be both affordable and a good investment. The Australian electorate wants it to be a good investment. Government is simply giving them what they want. If such a policy actually succeeds long-term, then most young people will live in inadequate housing because they can’t afford otherwise.

    Falling living standards, housing insecurity, and slums are not a bug. They are a feature of the policy, and indicative of a massive successful transfer of wealth to land-holders. This is the desired outcome, and it is what will come to pass.

    Buenos Aires or Sao Paulo are the future of Sydney and Melbourne. Some people are going to get very very rich from this.

  4. To be “fair” to CIS Tulip, all he’s really saying is that insane rates of mass migration are fine, as long as you (ahem) “coordinate” the housing supply and throw in a dash of (fake) “congestion busting”. AKA business as usual.

  5. The Travelling Phantom

    https://www.3aw.com.au/why-there-has-been-a-sharp-drop-in-births-in-victoria/

    and this applies to all other states, reality is having kids is very expensive in this country, transfer of wealth from the older generation to the younger isn’t happening, leading to the choice of having no kids..add to it high level of migration that pushes prices of everything and congestion to the stratosphere…yet all levels of governments cant recognise the real problems

  6. The population continues to increase for a few years after immigration stops, because immigrants have 3 children on average while non-immigrants have only 2 children on average. The population of Australia has increased by 35,000 from 2020 to 2021, with “natural” increase of 131,000 and NOM of -95,000. The term “natural increase” (which I despise) cleverly hides the fact that it is actually a delayed effect of immigration. The true “natural increase” among the Australian-born population and their children is zero.

  7. Australia needs a population of about 50 million to secure its future and be economically viable. Successive governments have bungled everything. It is all about having vision and looking to the future.Smart Cities. New Urbanism concepts. Palatial Highrises. A change in the terrible public mindset. Gentle – or perhaps not so gentle persuasion – Markets and Governments need to develop skill sets in this. Respect for the land. ……..

    These are Policy/Planning issues that cut across and interlock.

  8. So IGR says we’ll be bigger by 13m people in how many years?
    We really are kidding ourselves that we could ever meet any CO2 targets no matter what we agreed to. With that rate of increase it won’t matter where our energy comes from.

    • true that! everyone commentating on AGW seems to overlook the fact that its the scale (size and rate of growth) of the human plague that is the largest challenge to overcome if we are to save the planet…

      • Absolutely right. William Rees, a Canadian scientist who was involved in developing ecological footprint calculations, gave a presentation that makes the relative contributions of consumption per capita and population growth very obvious, by looking at the changes since 1960:

        Increases in population and ecological footprint per capita since 1960:
        High Income Countries: Population Growth (PG) 35%, Ecological Footprint per capita (EF) 20%
        Upper Middle Income Countries (China, for example): PG 120%, EF 89%
        Lower Middle Income Countries (India, for example): PG 206%, EF 40%
        Low Income Countries (mostly in Sub-Saharan Africa): PG 287%, EF 0%

        https://www.youtube.com/watch?v=o3nCFwhV-9E

        • Tania – thanks for sharing that, such a brilliant presentation. I’ve been describing ‘Overshoot’ for many years, just didn’t know there was a term for it and such an elegant description. Bill’s logic and reasoning is pretty hard to argue with! cheers 🙂

  9. Firstly, on housing try compounding the original prices using a benchmark of 7% (to tread water in real terms) and the present market value of detached housing and units comes out as about the same? Bit more in cities, especially Melbourne and Sydney, but most temporary residents described as ‘immigrants’ are just that and tend to rent….

    Our supposedly high (undefined) ‘immigration’ is largely a symptom of increased working age and youth mobility i.e. international education, and an unannounced change in the UNPD defined NOM expanding to 12/16+ months, resulting in raw population spiking upwards after 2006 (missed or ignored by all media in Oz including MB).

    Further, how credible are these think tanks like CIS or IPA when part of the Koch’s global Atlas network which promotes radical right libertarian socio-economic ideology?

    If no ‘immigrants’, next will be Australians of working age (paying taxes to support services for an ageing permanent population) who will be targeted, stripping them of any hard earned benefits and rights, backgrounded by cuts to taxes and govt. services; some jockstraps in finance have suggested a need to stop immigration, then using an ‘Americanism’ stop ‘welfare’ e.g. unemployment benefits….. careful what you wish for…..

    • Migrants grow old, too, just like everyone else, and they cannot be deported when they can no longer contribute to the economy. What do we do when they also need pensions and healthcare? A lot of today’s elderly were young migrants in the 1950s and 1960s. We need to change our economy to a more sustainable model, not bringing in more and more people every year so that we devour everything and wreck whatever personal freedom and quality of life that we have left.