The government's decision to slash immigration numbers by 18,500 during the 2007/08 financial year will hit Perth, Brisbane and Adelaide the hardest, but NSW will be safe, according to an expert.

John Edwards, CEO of Residex, said that the 14% cut in immigration numbers translates into a need for 8,000 fewer rentals than would otherwise have been required.

However, he pointed out that there is currently 50,000 unmet housing demands in the market and the cuts will not hit the rental market equally throughout the country.

"The unmet demand is much greater in some states than others. For example, NSW has 63% of Australia's unmet demand, Victoria has 16% and WA has 14%. The immigration cuts will also be greater in some cities than others as they have been made in the construction and manufacturing employment streams, where job losses have been greatest. Most of the migrants in these streams come from the UK and New Zealand, and the rental markets most impacted by the reduction are Perth, Brisbane and Adelaide," said Edwards. 

Perth has 36% of its permanent arrivals from the UK, and Adelaide has 29%, while 38% of Brisbane's permanent arrivals come from New Zealand, according to Edwards.

"This will lead to increased occupancy rates and lower rents. Reduced rents will lessen demand for owner-occupied housing by prospective homebuyers as it once again makes renting a less costly alternative to buying. This then lowers demand for houses and units for purchase, making housing a less attractive option for investors in terms of both growth and rent return. A downward spiral is being set in train in these states which will lead ultimately to a reduction, not just in housing price growth, but in the attractiveness of the market for investors," he said.

With further cuts in immigration number expected, Edwards advised investors to focus on NSW which has the highest level of housing undersupply. "This will probably be only the first of the reductions in immigration, so save your investing strength for the state which will do best in this environment, NSW. Its failure to provide housing is now our saviour. Look for bargains in Sydney. But please do your research so you buy in the right area at the right price."