In a development that has sent the education sector spinning, this week the federal government announced legislation that would put a cap on new international student commencements.
If the legislation passes, the number of commencements would be capped at 270,000 for calendar year 2025 as part of a wider move to slow down migration.
While this represents a significant drop of around 53,000 students compared to the number accepted in 2023, last year’s figures need to be put in perspective.
The number of international student visas granted last year was the highest on record. In significant part, the high volume was due to pent-up demand caused by the collapse in student numbers seen during the pandemic.
Comparing with pre-pandemic levels, however, the cap represents a drop of only around 7,000 students. So how much of an impact is this likely to have?
While the coffers of universities with high exposure to international students will undoubtedly take a hit, the cap is unlikely to have too much of an impact across the broader economy. Nor is it likely to provide much relief for the property market. At least, not yet.
Overseas students typically spend several years studying in Australia. This means that many among the record wave of students that arrived last year will be here for some years to come.
From a purely economic perspective, a high number of international students is good for Australia’s economy. Education is Australia’s fourth largest export and brought in a whopping $36.4 billion over the 2023 financial year. It was certainly one of the factors that prevented Australia from entering into a technical recession last year.
But this surge in overseas student numbers has also brought challenges.
Unfortunately, this boom in international students and broader migration has come at a time when our ability to deliver new housing has been severely hampered by high construction costs, capital constraints, and labour shortages.
As a result, the number of homes completed in Australia last year fell short by around 87,600 relative to the number needed to accommodate population growth.
There is no question that high levels of migration have been a key driver of the rental crisis. A total of 767,120 people arrived in Australia on temporary student visas over the 12 months ending June 2024. These were spread across higher education, vocational education and training (VET), schools, and English language courses.
This has placed instant pressure on an already strained rental market and is one of the contributing factors behind the low vacancy rates and high rent growth seen over the past two years.
Rent growth from surging student numbers can be seen in “student suburbs”. Examples include Clayton, home to Australia’s largest university Monash, which saw unit rents up 20% over the 12 months ending July, and Glebe, near the University of Sydney which saw rents up 17%.
While international students are a major boon for Australia’s economy, more people necessitate more homes. And unfortunately, we are not building these homes fast enough.
This fact has been recognised by the federal government who, in announcing the cap, acknowledged the need to “encourage universities to create new supplies of student housing to benefit both domestic and international students”.
On this front, there are some positive signs. In recent years, state and federal governments have been repealing some of the tax barriers preventing offshore institutional investors from developing residential projects in Australia, such as purpose-built student accommodation and build-to-rent.
Foreign investors typically use managed investment trusts (MIT) to buy Australian real estate and can be hit with a 30 per cent withholding tax. The legislation currently under review would reduce this withholding tax to 15 per cent.
Given foreign investors account for the vast bulk of capital driving the development of student housing and build-to rent accommodation, should this pass it would likely stimulate development at a time when the need for more rental accommodation is critical.
