So-called experts in the property market were busy again last year making housing market forecasts based on flawed comparisons between our housing market and those overseas. They must have already forgotten that this analysis technique was thoroughly discredited when the USA’s sub-prime housing market crash and price falls around the Western world in 2008 and 2009 were not experienced in Australian markets. In fact, according to property sale data, apart from a slight dip in the third quarter of 2008, our housing markets have continued to grow each year since 2007 in complete contrast to most other property markets.

There are, however, a number of reasons why overall housing market growth is likely to be patchy and why some markets may stagnate during 2011, especially first home buyer markets, the older middle distance suburbs of major cities and the top end of the market. On the other hand, rents in many inner city areas can be expected to rise and lead to more investor activity. The causes are to be found in the changing nature and makeup of our population. It is people who create demand for housing and as our housing needs change, so do housing market prices and rents.

Overall, it’s difficult to expect anything positive to occur in the housing market this year from our federal and state policy makers. Economic conditions are far from rosy and economic growth is favouring the regional and rural markets, where mining activity is strong and the drought is well and truly over. Because of this summer’s disastrous floods and cyclonic activity most government programs will be focused on reconstruction and rehabilitation, rather than on new housing initiatives. The Federal Government is now effectively hamstrung by its need to placate several opposing minority factions just to stay in power, while the raft of outgoing State Labor Governments has been characterised by a lack of any policy initiatives that will shake up the housing market in any way and their successors seem content just to regain power.

New households are changing the housing market

In 2010 there were around 150,000 new households created in Australia. Approximately 65,000 of these were Gen Y (groups, singles and couples aged from 15 to 24) leaving home and their number is increasing. This is a direct result of the increasing number of overseas arrivals to our shores over the last twenty years. Most of these new residents started families after their arrival and as a result most Australian residents now have at least one parent who was born overseas.

With no real government incentives, budding first home owners have insufficient motivation to enter the buyer market in the current economic scenario. Interest rates are still more likely to go up than down and lenders are reluctant to provide housing finance into a first home buyer market which they perceive as having the greatest risk. The brakes have been applied to prices in traditional first home owner occupier markets such as lower priced houses in new outer suburbs and the more affordable new unit developments along suburban growth corridors. These new householders will be renters for some years yet, until some fundamental changes occur to their purchasing ability.

Living in group, share and multi-income households gives Gen Ys the opportunity to rent dwellings which they cannot hope to buy. They favour well-appointed units located near their places of employment, recreation and relaxation, and as their numbers grow, the demand for inner city and inner suburban unit rentals in our major population centres will continue to rise. Due to this rise in demand, we can expect rents in such markets to grow over the next few years and the resultant high rental yields will then generate further investor interest, leading to price growth. These may well prove to be the best investment prospects in capital city markets over the short term.

The impact of overseas migration on our housing markets

Of the 150,000 new households created in Australia last year, around 90,000 were new migrant family arrivals. While this is still higher than the number of new households from natural growth, the number of overseas arrivals has reduced substantially in the last twelve months.

One of the most disturbing by-products of last year’s federal election is that it seems to have led to a reduction in the overseas migration intake, causing our population growth rate to fall to its lowest level in years. Not only do migrants generate economic growth and create more new jobs than they take up, each new migrant family needs a home to live in and so they provide immediate demand for rental accommodation – housing investors’ bread and butter. Let’s hope that this cut in overseas arrivals was only a temporary reaction to the anti-migrant hype whipped up during last year’s election campaign, rather than an economically damaging new trend.

Australia relies heavily on overseas migration to maintain its relatively high population growth rate, and without significant overseas arrivals our housing markets would be in a similar predicament to those of Western Europe, the USA, and New Zealand. These are characterised by declining population growth rates (or in the case of Italy and Japan by a decline in the total population) and by rising median ages, leading to a greater demand for low maintenance housing in areas with easily accessible services and facilities and a drop in demand for traditional family style housing in suburban areas.

In our major capital cities, new arrivals almost invariably rent dwellings until they are established and any reduction has an immediate negative impact on rentals for the homes they prefer – cheaper, older houses and units in the middle distance older, well established suburban centres and corridors of our major cities. These tend to be located close to transport, facilities and employment in ethnically friendly enclaves and in recent years have produced some of the highest rental yields of our capital city markets, especially in Sydney, Melbourne and Adelaide.

Because of their strong dependence on overseas arrivals to maintain rental demand, rents in such areas are at risk of stalling and even falling if the cut in net overseas migration continues. Up to 50% of the dwellings in these migrant destination suburbs are investor owned and investors tend to buy in high rental yield areas. Therefore, rent stagnation could lead to investor sell offs. If you have investments in such areas, it’s certainly not time to panic, but definitely time to be watchful.