Many property and economic commentators have recently focused their attention to the impact of Foreign Property Investment on Australian house prices. If many media reports are to be believed, disaster is imminent. But, are the extreme negative connotations justified?
One of the golden rules of successful investment is research. The varied and conflicting opinions regarding the future impacts of foreign investment on the property market present real navigational challenges for the property investor…
So, what is all the fuss about? The Australia property market is currently facing some affordability challenges with many first home buyers being priced out of the market. Overseas buyers are paying over and above the expected market price. Stock levels are low in some areas and given predicted population growth, this is likely to continue without changes.
On one side of the fence you have those that believe foreign investment in Australian property is driving the high and increasing property prices. On the other hand, you have those that believe the media ‘hype’ around foreign investors causing the housing crisis is not totally justified and Government legislation change is required.
A recent report by International financial services group Credit Suisse found that Chinese buyers currently spend approx. $5.4 billion a year on Australian properties, stating ‘‘A generation of Australians are being priced out of the property market. Many face a life time of renting”
The same report states Australian incomes are not keeping pace with the increasing Sydney and Melbourne median house prices, opening the market up for wealthy foreign investors. It is estimated that 18% of new Sydney properties and 14% of new Melbourne properties are being snapped up by the Chinese.
Unfortunately, ‘figure distortion’ can be found in several media articles. Some cite the Foreign Investment Review Board (FIRB) data showing a record 5,091 homes worth $5.4 billion were purchased by overseas buyers; compared with 647 properties valued at $810 in 2009-10.
The figures are not the problem, rather the use of them to draw comparisons. In 2009-10, Government policy (which was later reversed) severely diminished foreign purchases, meaning this year is not a true comparative period!
In fact, the FIRB reports a fall of more than 12% in total approved investment in real estate during 2012-13 compared to 2011-12.
However, the National Australia Bank quarter 1 2014 residential property survey highlights the increasing demand for residential property by Foreign buyers’, rising significantly from 11% in December 2013 quarter to 13.5% in March 2014 quarter.
The numbers should be compared against total properties and value in Australia. The Australian Bureau of Statistics estimates there are 9.3 billion Australian residential dwellings worth more than $5 trillion!!!!
One may very well consider foreign investment a minor amount when compared to the total Australian residential property market and wonder how some believe this is driving property prices up…
The true foreign investment figures are very difficult to estimate as foreign investors are using a variety of methods outside the FIRB, including using nationalised family members to acquire established properties, or using temporary visas.
There is also great disparity around the definition of Foreign Investors, hence figures are interpreted in many ways by commentators and analysts; resulting in mis-information being provided.
The Real Estate Institute of New South Wales (REINSW) believes the view that foreign investors play a negative role in the Australian property market is misguided and the impact overstated.
They believe “the government has created a situation where foreign investors are being encouraged to buy new property and therefore they’re competing against the first homebuyer…. It’s time to give the first homebuyer a break and stop pitting them against foreign investors and those who are purchasing properties to fund their retirement”.
Many believe the powers and resources of the FIRB are limited and unable to adequately police the original intention of increasing supply by permitting foreign buyers to purchase only new or off the plan properties and control the localities of foreign v domestic ownership.
With strong evidence that foreigners are flouting the laws, putting upwards pressure on house prices and potentially enhancing risk of instability, Treasurer Joe Hockey has asked the Economics Committee to investigate foreign investment in residential real estate.
The results of this will be very interesting and hopefully benefit the Australian housing market, investors, first home buyers and businesses alike.
Watch this space!