It’s time to call it…. Destination Australia!
I’ve loved watching the Winter Olympics over the past week or so.
While I wasn’t inspired quite enough to take up downhill skiing, I did find myself craving a visit to the northern hemisphere ski slopes.
I was therefore thrilled when it was revealed during the week that Australia is officially reopening to the world!
Nearly two full years after international borders were closed in March 2020, they will fully re-open on February 21st.
That means that overseas tourists who are double vaccinated will be able to come to Australia without having to quarantine.
The reopening of borders is a massive win for the Australian economy. It’s going to provide a much-needed boost to the travel, tourism and hospitality industries that have been crippled by the pandemic.
Prior to the pandemic, there were an average 800,000 people arriving in Australia from overseas each month. That number is sitting at just 15,000 today.
Overseas tourism was – and will continue to be – one of Australia’s biggest exports. In fact, three and a half cents of every dollar spent in Australia came from overseas tourists in 2019. That worked out to be nearly $45 billion a year.
What’s more, the tourism industry employs 660,000 Australians, which equates to roughly one in twenty of all jobs throughout Australia.
The second benefit it will have on the economy is that it will bring some much-needed workers into our country, which will in turn help the many industries and employers who are finding it hard to fill positions today.
Not to mention the raft of businesses that have had to close or operate at limited capacities because of the impact isolation requirements have had on their workforce. That one doesn’t show up in the employment statistics.
The unemployment rate in Australia is nearing 4 per cent, which is almost full employment, but certain industries are struggling more than others.
Professions such as teachers, engineers and nurses are in critical shortages today because they require training and experience, it’s not easy to fill those positions. Therefore, bringing in skilled migrants is going to be vital to ensuring a balanced and stable workforce. Again, prior to the pandemic, Australia was getting the benefit of 132,000 people per annum arriving as skilled migrants to assist with filling jobs.
Finally, the opening of international borders will also have a big impact on the property market, but perhaps not in the way you might think.
While migration brings demand for real estate, it’s probably not going to have the effect of driving up prices in the short term.
The short-term impact of opening up the international borders will be that it creates more demand for rental accommodation, given the majority of migrants rent for the first few years before looking at buying a home.
We don’t have a lot of rental accommodation in Australia today. The vacancy rate in Australia is less than 2 per cent with some sources having it as low as 1.3 per cent. For perspective, 2.5 per cent is regarded as a balanced rental market with strong demand and decent enough supply.
This rental shortage is a big reason why rents increased by up to 10 per cent in some capital cities in 2021. While rent increases were higher for houses, it was felt across the board. Rents for units were up by more than 5 per cent in most capital cities, too.
When you consider wages are only growing by 2 per cent today, a 5 per cent increase in rent is significant but a 10 per cent rent increase is off the charts!
With international borders reopening, I wouldn’t be surprised if we see a similar trend again in 2022.
That presents a big opportunity for property investors. I wrote about the impact of inflation on interest rates in my blog last week. On a typical property, a 10 per cent increase in rent would have the same effect on your cash flow as the bank increasing your rates by half a per cent. Hence why I say there’s so many moving parts to this discussion.
If you own property, make sure you do your research on market rents when the lease expires. It makes a big difference to your cashflow if you can get a rent increase of 5 per cent to 10 per cent!
You can use my FREE budget tool to help you work out what an increase in rents, or interest rates, could mean for your cash flow.
P.S. One reader last week rightly pointed out a typo in my blog – inflation was nearly 18 per cent in 1975, not 1978. Thanks for the pickup!
Investing regional?
Q – I am trying to buy my first home. It looks like I can only get a borrowing capacity of $350,000 because I don’t meet the banks servicing, so I won’t be able to get anything near a capital city. It looks like I could buy something in a regional area as an investment for that price, though. What do you think about investing in regional areas?
A – There is a bit to unpack in this one.
First of all, I’d be getting a second opinion on your borrowing capacity. In my experience, the difference between $350,000 and $400,000 (which would get you into a capital city) isn’t significant. I always prefer to get that second opinion from a broker because they have access to different lenders with different servicing calculators.
I hear you on getting into the market, rather than sitting out, and regional areas have had a good run in recent times.
It’s not that I’m against regional areas per se, but I think the capital cities offer a more stable and secure investment than the regions.
I think if you choose to buy in a regional area, it’s important to do your research.
Try and go for one with a stable population and diverse job offering. I’ve had friends who have invested in regions before, only for the property value and rent amounts to yo-yo up and down by as much as 50 per cent between the top and bottom of the cycle.
Most importantly, make sure you buy something new or near new, with a strong rental yield (4.5 per cent minimum). That way, even if values move up and down a little, you still have the cash flow to pay your mortgage and tread water until things rebound.
All the best with it!
James Fitzgerald
Author, BULLETPROOF INVESTING
