The short-term impacts
The impacts of negative net overseas migration are felt most significantly in the financial years ending 2021 and 2022.
In 2021, Greater Melbourne’s population is forecast to remain almost stable, growing by 12,000 persons. In 2022, growth is forecast at only 23,000. In these two years, a number of Melbourne SA4s are forecast to decline in population.
In percentage terms, the Melbourne-Inner SA4 fares worst with a decline of 0.8% in 2021 and 0.2% in 2022. This is direct result of the locational impacts of change in net overseas migration. By 2023, as NOM is expected to recover, all areas in Greater Melbourne experience population increase.
The impacts of lower fertility rates are also significant in these results. The updated forecasts adopt the fertility assumptions used in the Centre for Population forecasts for the Federal Treasury.
The decrease from a longer-term Total Fertility Rate (TFR) of 1.70 in the previous forecasts to 1.62, results in considerably lower numbers of births, particularly when combined with drastically lower rates of NOM in the fertile age groups.
In addition to this longer-term trend of decline, the paper by Professor McDonald also assumes a shorter-term decline and recovery based on the immediate impacts of Covid, particularly the effects of economic uncertainty and recession.
This is consistent with the historical impact of recessions on fertility rates. Births are deferred as employment and income is uncertain. As the economy improves many of these deferred births take place, and these assumptions have been adopted in our forecasts.
The impact of lower fertility rates will be fewer births. This in turn is exacerbated by the decrease in NOM, as overseas migration is heavily skewed to younger adults of fertile age.
The impact of updated population forecasts on dwelling demand and construction is profound.
It is estimated that Victoria added 60,000 dwellings in 2018-19. In the financial year ending 2023, construction of only 38,000 dwellings is forecast.
There is unlikely to be sufficient population to occupy dwellings in the same way as the last 10 years. Based on what is under construction and likely to constructed in the next two years, vacancy rates in Greater Melbourne are forecast to increase from 5.5% in 2019 to 8.7% in 2023. The numbers of vacant dwellings in Greater Melbourne are expected to increase by 38% in the period from 2020 to 2023.
What is unclear is how the construction sector will respond to this enormous decrease in dwelling demand.
While greenfield estate construction may have some ability to decrease or increase supply to cater for changes in demand, large apartment construction projects are less able to be scaled back and deferred.
The completion of large numbers of apartments over the next 12 months in combination with a stagnant or declining population will result in large increases in vacancy rates.
It is unclear how downward pressure on prices and rents will influence household formation. There may be some likelihood of new households taking advantage of lower prices. This would result in greater decreases in average household size than we have forecast.
Change in total population vs change in dwellings
The chart below shows the relationship between population growth and dwelling construction in Greater Melbourne. In the 2021 and 2022 financial years, it is forecast that there will greater growth in dwellings than persons. This large ‘overhang’ in dwelling construction will result in vacancy rate increases.