(Image: AAP/Lukas Coch)

A huge economic event is happening, not that you’d read about it. It’s influx time for foreign students, with major implications for the rest of us — especially anyone in the rental market.

The Reserve Bank of Australia (RBA) singled out service exports in its most recent statement on monetary policy. It pointed to tourism, which is limited by the number of flight arrivals, and foreign students, whose appearance is limited by the rental market. Both count as exports: they are, after all, Australian-made things being sold to foreign consumers.

Services exports have recovered further. International student commencements increased in the first half of the year and have reached their pre-pandemic levels at several universities. Demand from students from South Asia has been a strong driver of the recovery, and universities expect student commencements to grow further in the second half of 2023. However, contacts have flagged that the tight rental market may constrain increases in student numbers going forward, particularly in Brisbane and Sydney.

RBA statement on monetary policy, August 2023

You don’t hear much about the foreign student influx, because it’s hidden in the seasonally adjusted data. Economists love seasonally adjusted time series. They’re important in some contexts, showing when a fall is actually a rise and vice versa. But they can occlude as much as they reveal. 

Imagine if we didn’t understand how retail peaks in December. We’d miss an important way of understanding the economy. So it is with migration. Tourism and international students all show significant seasonal variation.

As the next chart shows, foreign student arrivals are concentrated at two times of year: January-February, then July-August. That matters. The red bars show actual arrivals net of actual departures, and the most recent data point is June 2023. That red bar is negative: more students left than arrived in June. But by looking at the pattern of history we know that a fall in June will be followed by a surge in July-August, when semester restarts.

The pale black line is seasonally adjusted — it goes crazy in the pandemic when the seasonal pattern drops out, then looks high and steady ever since as students return. 

Rental vacancy rates look like the inverse of the above. Rental vacancies fell in July as the student boom began, dropping from 1% to 0.9% according to Domain data.

While the economic benefit of selling education to foreign students is spread throughout the year, the hit to the rental market is concentrated on the time of arrival. Rental vacancies are already low, and if a wave of students arrives, that pressure on the rental market can be released only via higher prices. That is driving up rents right now.

SQM Research maintains a database of weekly asking rents. Unit rentals show a distinct seasonal pattern with a lift in January-February, a peak in July-August and a slackening in November.

Rising rents will put pressure on the consumer price index. Rents are one of the fastest-growing components, and our services exports are exacerbating the impact. 

Interest rates, in theory

In theory, higher interest rates should dissuade exports and make imports cheaper. The higher rates are supposed to lead to a higher dollar, rendering foreign goods cheaper and making us into a nation of importers. We should be buying Italian tomatoes and holidaying in Bali, thereby reducing demand in the Australian economy. But our currency hasn’t lifted much in the recent interest rate-cutting frenzy, because most countries are in the same boat, raising rates alongside ours. In fact, despite the rate rises, our dollar has weakened against the US dollar, down to US$0.65. It is also broadly stable against the Chinese yuan and the Indian rupee.

A low-ish Aussie dollar makes Australia — including Australian rents — look relatively cheap for foreign visitors. 

Even Airbnb, which will expand as inbound tourism recovers, is constrained by the tightness in the property market. And it is no surprise that it is the target of online rage, as it is perceived as taking property out of the rental market and making it even harder to find a place to live. 

This is the problem with in-person services exports. They put pressure on the part of our economy that has the least capacity to respond, the least elasticity of supply — residential property. Whereas goods exports and other types of services exports, such as business services, can scale more easily.