Once regarded as the most-desired rental stock in the country, inner-city markets have been the laggard of the latest property boom.

Let’s analyse the impact of the border closures on the rental market and discuss the likelihood of a bounce back.

One of Australia’s earlier policy responses to the COVID-19 pandemic was to close the international border.

The border was closed to non-residents on 20 March in 2020, 10 days after Australia recorded its 100^th case. Returning residents were required to quarantine in state-run hotel facilities from 27 March.

Unsurprisingly, this near-complete closure had a dramatic effect on Australia’s overseas arrivals – and on the Australian economy.

The cessation of temporary migration had a particularly big effect on two sectors: tourism and education.

For the higher education sector, this was a big change. Overseas students accounted for a little more than one-quarter of total higher education students, Department of Education, Skills and Employment data shows.

This amounted to more than 400,000 overseas student enrolments and more than 800,000 gross arrivals into Australia in 2019. [1]

That all changed in early 2020.

Recent migrants disproportionately live in inner-city areas

Border closures also affected Australia’s rental markets.

Many of Australia’s major universities are close to the city centre, and so many overseas students opt to live in central suburbs close to campus.

We can see this clearly in the chart below.

Data from the 2016 Census shows that recent migrants are more than three times more likely to live in the inner-city than in outer metropolitan suburbs or regional areas. [2]

Recent migrants account for 3.5% of the population in inner-ring suburbs, compared to just 1.1% in outer suburbs and 0.8% in the regions.

Many of these inner-city areas have recorded falls in rent during the pandemic

A key feature of the pandemic has been a change in where renters want to live, and what they’re willing to pay.

This reassessment means we’ve seen inner-city rents fall in some areas, while rents in outer suburbs and regional areas have grown quickly.

For inner-city areas, the loss of temporary migrants – and students in particular – is part of the story. With far fewer students, there has been reduced demand to rent in inner-city areas.

You can see this in the chart below.

Areas to the right of the chart are places migrants are more likely to live. Broadly speaking, these suburbs have seen median rents grow more slowly or decline compared towards areas on the left of the chart where recent migrants are less likely to live.

Inner-city Sydney has seen similar outcomes, with median advertised rents falling 7.7% over the same period.

It could also be part of why we have seen fewer available rentals in January this year than we’d usually expect.

January is normally the busiest month in Australia’s rental market, but this year activity was more subdued.

January is usually when international students would arrive to start the academic. These students would have leases expiring at the start of the year, bringing those listings back onto market. With practically no international students arriving in January 2021, that churn didn’t happen in January 2022.

The reopening of borders will bring some demand back to these underperforming rental markets

As the border reopens and temporary migration resumes, we will start to see these inner-city areas become more sought-after again.

But we probably won’t see a complete reversal because it is not just migration that has driven the underperformance of rents in these inner-city areas. These are areas that have become less attractive to renters for myriad reasons.

Inner-city suburbs have traditionally commanded a premium because of their proximity to CBDs and public transport. But with many people working from home, that factor has become less valuable.

Similarly, people now value having more space or living close to a beach more than they did pre-pandemic. That also makes denser, inner-city areas less attractive.

These changes will not immediately reverse simply because the borders have reopened.

[1] One student can account for multiple gross arrivals if they leave and come back.

[2] “Recent migrants” is broader than just higher education visa holders – eg it includes temporary skills visa holders and working holiday visa holders as well as vocational and other student visas. But higher education students are a very significant share of temporary visa holders (excluding tourism/visitor visas) and so are the key group to consider. In calendar 2019 there were twice as many higher education temporary visa holders entering Australia as there were working holiday visa holders; and three times as many as there were temporary skilled visa holders.