Is Immigration The Key To Growth?
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Is Immigration The Key To Growth?

An influx of people could calm future volatility.

By Paul Miron
Thu, Nov 11, 2021 1:42pmGrey Clock 5 min

OPINION

Australia has been blessed over its economic history, weaving and dodging through major financial crises relatively unscathed. It entered the COVID-19 pandemic, which has caused the most severe global economic shock since the Great Depression, from a position of extreme strength — the budget was in balance for the first time in 11 years, workforce participation at a record high and welfare dependency at its lowest in a generation.

Australia was bathing in the glory of the most prolonged uninterrupted GDP growth worldwide in 30 years.  Australians also have emerged post-COVID as the wealthiest people per capita globally. Australia’s economy is the most robust according to OECD as per below.

Has our luck run out?

Learning From The Past

In every significant economic challenge presented to Australia over the past 30 years, there has been unexpected good fortune that allowed Australia to adapt and find new opportunities.

That was not always the case, as in the 90’s recession we experienced a period of stagflation, reflected by high inflation of 5.5%, negative GDP growth, official interest rates of 12%, and unemployment of 12%, with the manufacturing industry being decimated.

At that time, Australia ranked extremely low within the OECD nations regarding income per capita. At the time, Singaporean Prime Minister Lee Kuan Yew berated Australia, warning Australians were on track to become “the poor white trash of Asia.”

Despite the dire circumstances, Australia has used this era to introduce successful economic reforms that have served well for many decades.

Our economy adapted and prospered to new opportunities such as mining, tourism, and education. Fast forward to 2007-2008, whilst the world was haemorrhaging during the GFC, our stringent banking regulatory framework led to our four leading banks being amongst the top ten in the world at the time, cushioning the crisis and emerging even more robust post-GFC.

Present-day Challenges

The emerging economic impacts of COVID have some similar traits to those of the ’90s.

Once the inflation genie escaped from the bottle, we now see the latest inflation figure of 2.1% year on end at their highest. Importantly, this has been the case over the past six years and indeed inflationary economic indicators are not abating. Vigorous debate is brewing among economists and academics whether inflation is truly transitionary due to lockdowns.  Other words such as stagflation, hyperinflation, sporadic, core inflation, deflation, and asset inflation have been added recently to our vernacular.

The genuine concern is that despite the RBA governor’s assertions that interest rates will remain unchanged until 2023, it is unlikely that he will want to play chicken with the threat of inflation and so be unwilling to increase interest rates. By raising interest rates, nearly all assets will reverse their stellar fortunes, and deflate accordingly. The increased risk of an uncertain economic recovery and recessionary risks will continue to plague consumer confidence as a result.

The 2021 Intergenerational Report

It is a report commissioned by the government to explore the economic drivers for the next 40 years.

The report outlines the three pillars of Australian economic growth for the next 40 years.

Population: Increase by net migration, considers impacts of net deaths and births.

Participation:  The workforce is defined by demographics and willingness to work, unemployment rate, or summed up as the total work hours of the output of the entire workforce.

Productivity: Is the average output per unit of input. Productivity can be enhanced using technology and capital investment in creating efficiencies in the workplace.

The single item that governments can immediately impact is the level of migration that drives population growth. As markets are efficient and competitive, immediate advantages and adaptation of new technologies are therefore temporary.  However, in conjunction with the balanced migration policy, these can further improve both participation and productivity, delivering positive economic outcomes.

The International Monetary Fund (IMF) has found that 1% growth to the subsequent migration adds approximately 2% to the national GDP. It also impacts productivity per worker as it complements the existing population and negates an aging population.

Migration traditionally occurs early in one’s working life, eliminating the incumbent government’s education, infrastructure, and health costs.

In the USA migrants currently constitute 15% of the total population and make a significant financial contribution. 30% of all businesses, 40% of all fortune 500 companies, and 50% of unicorns (start-ups worth more than 1b) are founded by migrants. In the US, migrants are the most significant contributors to innovation and entrepreneurship, leading the US to the largest economy in the world.

Despite negative and false myths claimed by opponents of migration, migrants do not take locals’ jobs and burden society, as confirmed by endless and ongoing economic research.

Australian Economy Wins Through Immigration

Australia is considered one of the most prosperous nations globally, embracing migration from both a social integration of multiculturism and financial perspective. One-third of the entire population consists of migrants, the highest percentage of any country in the OECD. Australia’s population has doubled since the ’70s, and the economy has grown 22-fold as a result.

It comes as no surprise that Dominic Perrottet, former NSW treasurer and current Premier, is calling for net migration to increase from 160,000 (pre-COVID) to 400,000 persons yearly intake. This is to make up for a lost time during border closures as confirmed by the intergenerational report. A favourable migration policy will give the Australian economy an additional stimulus.

Additional immigration will also provide a cushion for the many other risks that our economy displays, such as inflation, boosting GDP, and especially alleviating labour constraints in hospitality, health, financial services, retail, agriculture, construction, property, and tech. Immigration enables the construction industry, making up 8.8% of our GDP, to continue and provides an essential multiplier effect on our broader economy. Construction in Australia has a multiplier effect of close to three: for every $1 million invested, an additional $3 million is generated in the economy as a whole.

Migration, in turn, increases productivity, creates further opportunities for innovation, and generates jobs.

The balance is altering migration to accommodate the current and future needs of the economy. Student visa programs require urgent attention, expansions to different regions, loosening up the financial dependency restrictions, scrapping the max 20 hours a week that students are allowed to work under the visa. Let’s not forget education was the 3rd highest contributor to the nation’s GDP before COVID hit; this should aid our ailing University sector and bolster our unskilled labour supply.

Historically Australia was the 2nd highest net migration nation, followed by Canada. Canada recently announced they wish to increase their net migration an additional 1% ($1m p.a.) to 2.8% of their population with an immigration blitz. Who is keen to capitalise on Scott Morrison’s proclamation (Global Talent Initiative) of attracting the smartest and brightest in the world?

Planning For The Future

We believe there will be an increase in volatility in the coming months, given the uncertainty with inflation, economic growth, and threat to asset prices, not to mention that the Australian economy needs to shift away from its dependency on China and mining.

Australia was Built on the Sheeps Back with wool being our main export from 1871 to the 1960s, Immigration allowed us to innovate and grow by maturing as a nation and building a diversified and innovative portfolio of industry’s in which we excel.

Perhaps our history has shown that insufficient credit is given to immigration policy and its positive economic outcomes being one of the key critical elements allowing the nation to emerge from dire economic circumstances as demonstrated from the 70’s crises to today’s phenomenal economic success.

When it comes to the right migration policy, it needs to be creating diversity and combination, not just accommodating skilled labour, but also refugees, students and other temporary/permanent visa holders.

Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.

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Investor buying of homes tumbled 30% in the third quarter, a sign that the rise in borrowing rates and high home prices that pushed traditional buyers to the sidelines are causing these firms to pull back, too.

Companies bought around 66,000 homes in the 40 markets tracked by real-estate brokerage Redfin during the third quarter, compared with 94,000 homes during the same quarter a year ago. The percentage decline in investor purchases was the largest in a quarter since the subprime crisis, save for the second quarter of 2020 when the pandemic shut down most home buying.

The investor pullback represents a turnaround from months ago when their purchases were still rising fast. These firms bought homes in record numbers last year and earlier this year, helping to supercharge the housing market.

Now, investors are reducing their buying activity in line with the decline in overall home sales, which have slumped with mortgage rates rising fast. But with investors’ large cash positions, and with big firms such as JPMorgan Chase & Co. planning to increase its exposure to the home-buying business, investors are poised to resume more aggressive buying when rates or home prices begin to ease.

These firms have seized on a pandemic-driven rise in demand for houses in suburban areas. These owners rented out the homes and increased rents on homes by double-digit percentages. By the first quarter of 2022, investors accounted for one in every five home purchases nationally.

But ballooning borrowing costs have kept investors from buying as much recently, said John Pawlowski, an analyst at Green Street. Buyers and sellers are also agreeing less often on pricing, stifling sales.

“It leads to a lot of people just putting down the pen,” Mr. Pawlowski said.

Rent growth has also begun to slow. Rents for single-family homes rose 10.1% year over year in September, down from 13.9% in April, according to housing data firm CoreLogic.

That rate of growth is still very high by historical standards, however, and much stronger than in the apartment market. Multifamily rent increases are now much lower by most measures. Near record-high rental prices are failing to attract as many new tenants, and demand in the third quarter fell to its lowest level in 13 years.

Demand for rental houses has held up better, in part because many of these homes are leased to relatively high-earning people who have found the for-sale market too expensive to buy, some analysts say.

That rent growth for single-family owners hasn’t translated into stock-market gains this year. Investors have lumped these owners in with home builders and sold many of them. Shares for the three largest publicly traded owners, Invitation Homes, American Homes 4 Rent and Tricon Residential, are each down more than 25% year to date, underperforming the S&P 500 over that period.

Rental landlords also face headwinds from rising property tax assessments that have come alongside enormous increases in home-price appreciation.

At the same time, large rental landlords are coming under greater scrutiny from federal and local governments. Congressional Democrats have hosted a series of hearings focused on eviction practices and rent increases. Three Congress members from California this month introduced a bill called the “Stop Wall Street Landlords Act,” which proposes levying new taxes on single-family landlords. It would prevent government-sponsored enterprises like Freddie Mac from acquiring and securitising their debt.

Many of the places where investors have eased purchasing are the same cities where they had counted for an outsize share of total sales. That includes Las Vegas and Phoenix, where investor sales dropped more than 44% in the third quarter compared with a year ago.

Fewer purchases by online house-flippers, or iBuyers, may have contributed to those declines, according to Redfin. Redfin decided to close its own home-flipping business, RedfinNow, earlier this month.

Nationally, investors still accounted for 17.5% of all home sales in the third quarter, a higher share than they held at any time before the pandemic, by Redfin’s count.

That share seems likely to rise again. Builders with unsold homes due to widespread cancellations by traditional buyers have been looking to sell in bulk to rental landlords.

Meanwhile, some institutional investors are now readying large funds to snap up homes. J.P. Morgan’s asset-management business said this month it had formed a joint venture with rental landlord Haven Realty Capital to purchase and develop $1 billion in houses. A unit of real-estate firm JLL’s LaSalle Investment Management, in partnership with the landlord Amherst Group, said it plans to buy $500 million of homes over the next two years.

Tricon has nearly $3 billion it plans to tap to buy and build homes. “We will lean in and deploy that capital when the time is right,” Tricon’s Chief Executive Gary Berman said on a November earnings call.

While a recession could bring down borrowing rates, it would likely be accompanied by higher unemployment, making it difficult for traditional buyers to take advantage, said Daryl Fairweather, Redfin’s chief economist. For investors, however, that could offer an opportunity to acquire homes at favourable prices.

“An investor may have more resources to jump in at exactly the moment when rates decline,” Ms. Fairweather said.

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