Foreign ownership of Australian property has become an emotionally charged issue.
Of course there’s nothing new about foreign investment in Australia – it dates back to when we first became a colony and has continued ever since.
However, as property prices increase – particularly in Sydney and Melbourne – many are pointing the finger at foreign buyers.
One theory frequently put forward to explain the high prices is that the market has been flooded with foreign investors who fly in with wallets full of money and are willing to pay top dollar, locking out the locals.
Clearly there has been a new wave of foreign investment in Australian residential space and commercial property, and at the same time many foreign property developers (who use different funding models to local developers) have been buying up development sites outbidding local developers.
But do greedy foreign investors really push up property values?
Firstly, it’s important to understand that:
Australia has a regulated approach to foreign investment, compared with the open door approach of some countries like the US.
This means foreign residents, temporary residents, or short-term visa holders from any country need to apply to the Foreign Investment Review Board (FIRB) to purchase real estate in Australia.
Their guidelines cover who can buy what:
- Non-resident foreign investors are not allowed to buy an existing home (except in certain circumstances), but they can buy new homes and apartments or off the plan properties and vacant land.
- Foreign people living in Australia for no more than 12 months can buy one existing home, but they must live in it and sell it when their visa expires
Interestingly a parliamentary inquiry last year heard that the FIRB had not prosecuted a single case since 2006, which many argue renders the guidelines essentially ineffective.
What are foreigners buying?
NAB’s quarterly residential property survey released in October reveals that during the September quarter, 19% of all new apartments, and 14.9% of new homes, were purchased by foreign buyers, up significantly on the 16.1% and 11.5% levels recorded in the three months to June.
In Victoria, foreign activity was significantly higher than the national average.
Over the quarter, foreign buyers accounted for 28.5% of all new apartments sold, and 26% of all new homes.
But what raised a few eyebrows was that despite stricter restrictions on foreign investment in the established residential property market, the NAB survey suggests that foreign buyers also accounted for a significantly high number of established property sales.
Are foreign investors really pushing up Australian property prices?
Our relatively cheap Australian dollar, a new middle class in China with fears of future instability in China and the need to invest their money offshore in a safe economic and political haven has seen foreigners buy property using different criteria to local investors.
They see Australian property as an insurance policy –something they are willing to pay a premium for.
But this doesn’t mean foreign buyers are pushing up our market as a whole.
New research by University of Sydney Professor Hans Hendrischke has cast doubt on claims that foreign investment is pushing up Australian house prices, indicating offshore Chinese purchases totalled just 2% of all transactions in 2014.
This figure is so low that it would be hard to argue that foreign investment is driving the affordability crisis in Australian real estate.
Why we need foreign investment
The objective of Australia’s policy to foreign investment in residential real estate is to increase the supply of new housing.
And clearly it is doing this.
The wave of new property development, particularly inner CBD off the plan projects, has shored up our construction industry which stepped in to help our economy as the mining boom faded.
Without foreign investment many new building projects simply would not have been built as they were not financially viable for local developers.
Foreign investment has added to the supply of new housing and increases the supply of rental properties.
The downside of foreign investment
However I see some longer term issues with the level of foreign investment:
- Currently there is an oversupply of apartments particularly in the CBD’s of Melbourne and Brisbane, yet foreign developers are still busy building more towers to fulfil the demand of their overseas clients, despite the fact that vacancy rates in these locations are rising.
- Many of the inner city apartments being built are small and of a poor standard and are likely to become the slums of the future.
- Many of the buildings have a high (almost 100%) predominance of investor owners, rather than owner occupiers.
This is likely to create competition for tenants.
- The oversupply of properties will stifle capital and rental growth for many years to come.
- The high prices for new properties being paid by overseas investors who are not familiar with our markets, are enticing some inexperienced local investors to also buy into these apartment buildings setting themselves up for disappointment in the future.
Local Investors should be wary
I’ve often warned against buying in locations or buildings dominated by investors.
It’s owner occupiers (who buy with their hearts more than their calculators) who push up property values.
Similarly, locations or properties dominated by investors have the risk that as interest rates rise or sentiment turns (as it has in mining towns) they are more likely to sell en masse, lowering property values in that area.
I also see future problems with difficulty chasing overseas residents if they fail to pay their strata or owners’ corporation fees for the building’s upkeep.
The poor standard of construction could mean owners corporations could well run out of cash, and then you can see a scenario emerging where they can’t maintain the building to the standards required.
That could start a real slippery slide of other owners bailing out and a larger number of the units being on the market and prices then tumbling.