International border restrictions are expected to dampen the population growth in Australia, stalling net overseas migration until the next year. How will this phenomenon impact the housing market?

Australia's annual population growth is likely to moderate from around 1.4% pre-COVID-19 to 0.6% through the financial year 2020-2021, recent forecasts from the Treasury show. This could imply a reduction in the annual population growth from roughly 350,000 in 2019 to 154,000 by June 2021.

"If the Treasury forecasts are right, this means the rate of population growth will be the lowest since 1917," said Tim Lawless, head of research at CoreLogic.

With this scenario, Lawless said there are four likely outcomes for the housing market. The first impact will be on the rental markets, which would get substantially affected given their reliance on net overseas migration.

"A higher volume of rent listings, and falling rent values across key inner-city precincts. This phenomenon is already being observed, particularly across inner Sydney and Melbourne," Lawless said.

While things are slated to improve once foreign student arrivals start to normalise, Lawless said investors, in the meantime, would continue to face high vacancy rates and lower rents, both of which could potentially reduce their ability to service their mortgages.

"This may result in more distressed sale listings in these regions," he said.

The second possible outcome of reduced population growth is the lower valuation of units. Lawless said this could be due to the inner-city precincts being at the end of a surge in new apartment supply.

ABS figures show that there were 50,000 units under construction in New South Wales at the end of March and 45,000 in Victoria. These units could settle at a lower valuation, Lawless said.

"A large proportion of these are high-rise projects in inner city locations. Many of these yet-to-be completed projects will settle while rental vacancies remain high and rents are falling, which may put downwards pressure on property values," he said.

The construction sector is also likely to get caught in the chain reaction resulting from the low population growth, specifically due to reduced demand. However, Lawless said the impact on the sector will probably be uneven.

Lawless said demand for owner-occupier style multi-unit dwellings would be less impacted while investor-grade unit projects are poised to slow down for an extended period.

"Greenfield housing estates are also less impacted from reduced net overseas migration, with early reports that the HomeBuilder grant, together with low interest rates and first-home buyer incentives, are providing a solid boost to demand," he said.

In this case, Lawless believes developers and builders may need to pivot towards these more active sectors, at least while net overseas migration remains low.

The last impact of the low population growth would be the shift in growth drivers. As net overseas migration slows down, housing demand will likely depend on organic drivers such as fertility rate and interstate migration.

"There are already signs that major regional centres are benefitting from increased demand as some people look to escape the large cities, taking advantage of remote working opportunities, more affordable housing options and lifestyle considerations," Lawless said.