Is Queensland’s Property Market at Risk of International Contagion?

Journal, Property Market,  Buyers and sellers

There’s little doubt Australia’s fracturing relationship with China and the prolonged US-China trade war has impacted our local economy. Drawn-out disputes between the US and China have seen them both impose tariffs worth hundreds of billions of dollars on one another’s goods. Uncertainties around the trade war have hurt businesses and weighed on the global economy.

Then COVID-19 spread throughout the world. What began as an illness quickly turned to widespread fear in the reality of death as together we all continue to face this new and little-known virus. Pandemic controlled restrictions have been swift and substantial across the country, with a wide range of industries instantly affected, literally shutting up shop overnight. Chief among them, education and tourism – two major stakeholders with a firm grip on the domestic property sector.

Compounding pressure upon both sectors came in the unexpected form of a warning shot fired from the Chinese Ambassador to Australia, Cheng Jingye. As the Australian Federal Government led the petition for the WHO to conduct an independent inquiry into the source of the coronavirus, Jingye let it be known in no uncertain terms that Australia’s unwelcome diplomatic campaign would encourage Chinese citizens to reconsider traveling to Australia. To date, Beijing has levied tariffs as a kind of hors d’oeuvre. It’s a taste tester of other economic weapons to come should tensions escalate.

Education is a multi-billion dollar international student bonanza, with Chinese students making up the largest portion of international intakes in Australia. Accounting for about 0.6% of the country’s GDP, that’s approximately $11.34 billion. In fact, data from the Department of Education, Skills and Employment shows that in 2019, more than 261,000 Chinese nationals enrolled in local educational institutions at various levels. But when you navigate the numbers in more depth, cracks start to appear in the long-held belief that Australia is highly dependent on the Chinese market.

“Australia is more exposed to international markets than other educational sectors in other countries in terms of tuition revenue,” explains Dr Diawati Mardiasmo, Chief Economist for PRD Real Estate. “Students come here for the world class education and research, benefit from lower fees in terms of currency exchange, and because Australia is a great place to visit and study in.

“However, when you analyse the numbers in more detail, substantial growth in enrolments from other international markets certainly outstrip China’s growth within the educational sector, particularly in India and Brazil where Queensland boasts over 31% of market share. Regardless, universities still experienced a sharp drop in international student enrolments due to COVID-19. It’s a valuable market and why most institutions invest a lot into their international offices.”

While Australian universities were quick to aid students from mainland China in circumventing travel restrictions, it’s still estimated around 75,000 Chinese students were unable to enter Australia to commence their studies. Queensland’s annual international student intake is roughly 15.5% of the national total (around 100,000). China remains Queensland’s largest source market for international enrolments – 24%. From the previous year, enrolments from China grew above the national average (5.0%) by 8.9% to 23,813. However, when considering YoY trends, Chinese enrolments in Queensland have experienced an annual change of -15% – implying negative growth.

India was one of the only top 10 source markets to boast positive growth, recording an annual change of +35.8%. Enrolments from India grew 35.8% to 12,246, whilst commencements were up 57.7% to 4,146. Large growth for Indian enrolments in Queensland can be attributed 51.1% YoY growth in VET enrolments and 30.8% growth in higher education enrolments.

The Latin American market (Brazil and Colombia) are crucial source markets for Queensland as well, with the two making up 12.1% of total enrolments in the State. From the previous year, enrolments from Brazil were up 4.6% to 7,692. Slowing growth in enrolments from Brazil can be attributed to YoY declines in ELICOS enrolments (-3.5%) and large annual changes in VET enrolments (-33.8%). The ELICOS and VET sector make up 94% of total enrolments from Brazil. For Colombia, enrolments were up 19.9% to 4,262, whilst commencements were up 16.0% to 1,969. Growth in enrolments from Colombia within Queensland can be attributed to strong growth in the VET (26.7%), Higher Education (17.9%) and the ELICOS (15.9%) sector.

So, has there been much impact on the Queensland rental market when it comes to international student accommodation? Contrary to what the naysayers will have you believe, Mardiasmo doesn’t see much change within our rental markets across the board. “Even if you look at specific sections of the rental market, such as one-bedroom apartments located in high-volume university areas that you would traditionally consider to be reliant upon student tenancies, it’s simply not the case,” she explains. “It’s quite balanced across the market because it’s not only students renting in these areas now but also a good mix of professionals and young couples. In fact, more professionals have been entering the market over the last 12 months.

“If you do rely on international students, as a landlord you definitely need to consider diversifying your rental market. The good news is the demand is there.”

None of this should come as a surprise. Queensland’s residential rental vacancy rates for the first three-monthly quarter (1 January 2020 – 31 March 2020) show a relatively stable start for the year across major metropolitan and regional cities regardless of the perceived effects of the coronavirus COVID-19 pandemic. The State’s overall quarterly vacancy rate is 2.44%. This is a marginal increase of 0.1% from the last quarter’s 2.34%. This also represents a slight increase of 0.18% for a YoY comparison of 2.26% in January-March 2019.

“There’s no uncertainty that 2020 will be a difficult year for the economy,” says Antonia Mercorella, CEO of the REIQ. “However, what is certain is if you listen to what market naysayers are currently saying, you’d believe the property market is on the verge of complete collapse and rental vacancies are beyond ruin. What they fail to tell you is that they’re pitching dire worst-case scenarios where coronavirus restrictions are prolonged and a second wave of the disease occurs. When stacked up against credible sources and empirical evidence, it’s clear these kinds of predictions don’t reflect what’s really happening in Queensland real estate.”

Queensland’s latest quarterly rental vacancy rates show 44% of the State’s regions have experienced a decrease in vacancies, with 77% falling within a tight rental inventory range (0-2.5%) and 13% within a healthy rental inventory range (2.5-3.5%). With solid rental conditions, will that translate to solid rent levels? Mardiasmo doesn’t think so. “Rents will not remain at current levels but rental levels will likely see little change,” she offers. “Where are the renters going to go? Are they all going to purchase property and no longer rent? The rate of change from renter to buyer isn’t that quick. So, to make predictions that renters are going to disappear doesn’t make sense.”

That said, when you consider short-term rentals or holiday lets, it tells a significantly different story – most notably about the state of tourism. No surprises that our biggest market is China. Before the onset of the coronavirus, 1.43 million Chinese visited Australia in the 12 months prior and spent almost $12 billion, more than travellers from any other country. But is it all as it seems?

“Of that 1.43 million, around 22% visited Queensland – equivalent to approximately 315,000,” explains Mardiasmo. “When you look at 10-year growth figures, the number of Chinese visitors has grown by over 300% – so it’s understandable when people hear these kinds of figures that they’ll believe China is the number one source for international tourism. However, in actual fact the Chinese market only grew by 0.8% in the last 12 months to bring it into context.”

Not far behind China is New Zealand with 1.38 million visitors with a sharp drop to the next piece of the pie, the US at 789,000 followed by the UK at 733,000, two markets still struggling to control COVID-19, meaning tourists from either destination are unlikely to return for some time yet. So, do we still need to rely on the Chinese market?

“This pandemic is unlike any other situation we have experienced,” says Mardiasmo. “Even with the outbreak of SARS in 2003 and deregulation in the financial industry that lead to the Global Financial Crisis of 2008, the number of Chinese visitors to Australia only saw small decreases in both circumstances but also saw relatively quick returns with continued tracking upwards thereafter. And neither ended up with border closures or health inquiries. It provides little comfort also due to the unpredictable nature of how the politics behind the COVID-19 pandemic is currently playing out.

“Of course, it’s not going to be easy to diversify what will remain of our inbound tourism but Australia will be better positioned than many other tourist destinations when the pandemic is over as it will likely be viewed as a safe destination that’s dealt effectively with the spread of COVID-19. Our perceived isolation, once considered a tourist weak point, may well prove a strength.”

Mardiasmo further points to some compelling data, indicative that the short-term outlook may be sustainable. “In the immediacy, we can likely achieve healthy tourist numbers in other strong markets such as New Zealand. We also need to consider our top performing markets in terms of growth. For example, markets in India (up by 11%), Japan (up by 9.5%) and Singapore (up by 7.4%).”

Then there’s local tourism. Tipped to bring around $1 billion a month in local economic activity, Queensland’s Stage 2 eased coronavirus  restrictions now allow holiday-makers to travel freely throughout the state for the first time in months.

“With a renewed focus on local tourism and buying Australian-made products, Queenslanders are desperately looking to get out of their homes and explore,” adds Mardiasmo. “Logic tells me that the holiday letting sector will rebound. When? While that’s entirely dependent upon how the staged restrictions are rolled out, they are being rolled out earlier than originally planned, meaning it will help rebuild our tourism sector faster. Many people have postponed holidays and events, so there is pent up demand that‘s ready to go as life returns to relative normality, the economy moves into recovery and people start returning to work.”

It still leaves one question ultimately unanswered: What’s ahead for the Queensland property market? With Australia heading into recession, the International Monetary Fund is forecasting fairly balanced economic conditions going into and coming out the other side, based on the premise that effective containment of the coronavirus is successful of course.

“Queensland’s property market isn’t immune to the coronavirus economic fallout. The impact on property prices will depend on how long it takes to contain the virus,” says Mardiasmo. “It’s likely we could see a reduction in values around 5-7% (peak-to-trough). Having said that, when you review the numbers, the property marketing is growing stronger and stronger. We’ve seen an increase in prices – for example, in Brisbane, house prices increased by 0.3% in April (+4.2% over the last year) and units increased by 0.5% for the same period (+2.3% over the last year). We’re also seeing an increase in enquires. Those enquiring are serious buyers too – further evidenced by an increase in the translation from enquiry to buyer.”