Are foreign buyers really pushing up house prices?- Pete Wargent

Are foreign buyers pushing up Aussie house prices?

I’m not in the mood for flowery language today. It’s early. I haven’t had any coffee. Let’s cut to it.

Mineral exploration spend is tanking in Australia as yesterday’s data from the Australian Bureau of Statistics confirmed. AMEC has warned about this and has been calling for tax credits for losses on exploration to be fed back in to owners over the past year, but exploration expenditure is falling sharply.

Not such an interesting headline, though. The press are onto foreigners buying our houses again. Let’s take a look…

Background

Of Foreign Investment Review Board (FIRB) investment approvals, most are for mineral exploration and development, real estate (commercial and residential) and services.

Most everyone has a vested interest in residential property of one form or another, and therefore:

-renters trying to get on the housing ladder have long been arguing that wealthy foreigners are pricing them out; and

-owners of property are generally happy to sell to the highest bidder regardless of their origin. They tend to see foreign buyers of real estate as a non-issue.

The press have done little to help, to date, relying on anecdotes, and, in particular, picking out Chinese buyers for special treatment.

Inciting statements such as “At another auction in Eastwood, all 38 registered bidders were mostly Chineseare as grammatically nonsensical as they are devoid of substance.

The result has been that a good deal of spirited debate, with a little old-fashioned racism thrown in, but not much data. Until now…

Foreign Investment Review Board (FIRB)

The Treasury released the 2012/13 FIRB Annual Report late on Friday last week, gifting the press another easy new weekend headline:

Foreigners in splurge on houses“!

foreigners in splurge

An arresting headline, to be sure, though unfortunately even a cursory read of the Annual Report would tell you that:

“In real estate, approved proposed investment was $51.9 billion in 2012‑13, compared with $59.1 billion in 2011‑12 [a fall]

Proposed investment in commercial real estate decreased, from $39.4 billion in 2011‑12 to $34.8 billion in 2012‑13 [a fall]

Proposed investment in residential real estate also decreased, from $19.7 billion in 2011‑12 to $17.2 billion in 2012‑13. [a fall]”

I’m not so sure a fall of more than 12% in approved foreign real estate investment should be termed a “SPLURGE on houses”…but maybe that’s why I don’t write headlines for a living? Not to be so easily deterred the article presses on:

“Offshore buyers bought a record 5091 established homes worth $5.4 billion last financial year, compared with just 647 properties worth $810 million in 2009-10.”

Oh, please. Two things:

-5091 approvals to buy established homes (with conditions attached, as I explore below) across the whole of Australia is the story? Really?

-anyone who can read an Annual Report knows that 2009/10 is not a valid comparative period, since Rudd scrapped the requirement for temporary residents to apply for approvals in December 2008. Thus there were very few approvals in 2009/10.

The Annual Report even specifically flags as much. Data manipulation 101.

“Chinese buyers poured $5.9bn into property investment last financial year, topping the list of foreign buyers.”

True. Largely for commercial real estate, however.

“Foreign investment in vacant land doubled last year to $1.4bn, for development and “land banking”.”

Land banking? B0llocks. And finally we get there, and there is light:

“Overall, investment in real estate fell 12 per cent last financial year, to $34.8bn for commercial property and $17.2 for residential real estate. Only 50 new property projects, worth $5.7bn, were given FIRB approval to be sold directly to foreign buyers off the plan – half the value approved the previous year.”

Aha! Crumbs, talk about a non-story. And then the article reverts to type, citing wealthy Chinese buying up our houses. Only 11% of new housing stock is sold to foreign buyers, surprisingly, despite the lack of restrictions on new dwellings.

Proposals in real estate in 2012-13

Total approved investment in real estate was $51.9 billion in 2012-13 (compared with $59.1 billion in 2011-12), a fall of more than 12%. Foreign buyers may buy new or off the plan properties, but are not permitted to buy established stock without approval to do so.[sam id=40 codes=’true’]

Contrary to the popular cliché of “Hong Kong buyers…straight off the plane” (another classic recent headline) approved foreign investment in the category of developed residential real estate consists primarily of temporary residents in Australia acquiring one existing residential property for use as their residence in Australia.

Here’s where the vested interest inevitably comes in to play. Personally, I think if a temporary resident wants to buy somewhere to live, then if approved to do so, they should be allowed to. But them, since my wife and I own properties in Sydney, I would think that, wouldn’t I?

As a general rule, people who are not on the property ladder believe that priority should be given to them first, ahead of temporary residents and their families. And when I was a first homebuyer many years ago, I’d have no doubt felt exactly the same way. The invisible hand of self-interest and all that…

Foreign buyers may also apply to develop property, such as where they are subdividing a plot or constructing new dwellings. This adds to Australia’s housing stock, which is precisely what we need with a population growing at some 400,000 persons per annum.

table 28

Source: FIRB

A couple of observations:

-2009/10 is not a valid comparative period: the numbers were distorted since PM Rudd announced changes to screening arrangements for temporary residents in December 2008, a ruling which was later reversed;

-the approvals numbers are bordering on laughably miniscule – the Australian Bureau of Statistics estimates there to be 9,300,700 residential dwellings in Australia with a value of dwelling stock of $5,017,041,400,000 – that’s more than $5 trillion;

-a few thousand applications to buy established stock are so immaterial as to be trifling; but

-that said, approvals for foreign buyers may impact residential property prices at the margin; and

-I’ve heard that development approvals are being pushed through the system at warp-speed. The FIRB clearly has bigger fish to fry i.e. business investment cases such as Graincorp (GNC) or Qantas (QAN) than analysing approvals for buying real estate.

Development applications appear to be a box-ticking exercise which are granted approval more or less instantaneously by an administrator. Certainly, applications generally aren’t being escalated or looked at in any depth.

Investment by location

Including commercial real estate, then, a total of $51.9 billion of approvals in the last full financial year. Which locations stand to benefit? Pretty clear here: Melbourne and Sydney, and to a lesser extent Queensland and WA.

table 2 10

Source: FIRB

Investment by source

The approvals by country of investment source data raised a good belly-laugh for me, since the biggest category of real estate buyers originated from that well-known and oft-visited country…”Other”!

I sympathise with the preparer of the report. If you’ve you ever had write Annual Reports you’ll be familiar with the rule of thumb that if the ‘other’ category makes up more than 10% of a balance, then the component parts should be disaggregated further.

Given that the Annual Report was released late on a Friday, I suspect that rule of thumb was thwarted in favour of repairing to Martin Place Bar. And why not!

Anyway, the total FIRB approvals by origin and industry sector show the biggest investors in Australia to be:

-US (minerals, commercial and residential real estate, services);

-Switzerland (mineral exploration and development – presumably Glencore/Xstrata); and

-China (minerals, commercial and residential real estate)

And to a lesser extent:

-Canada, UK, Japan, Qatar, Singapore, Malaysia.

When it comes to commercial and residential real estate, the only big guns in town (>$2 billion approved) are USA, China, Canada and Singapore (and ‘Other’!)

table 2 11

Source: FIRB

Summary

So what do we learn from the FIRB data?

Firstly, the numbers of foreign buyers approved in any given financial year are a tiny drop in the ocean of our residential real estate.

Compare the situation in Australia to that of London, where it’s been estimated, a little loosely it must be said, that 50-70% of homes over £1 million are bought by foreign buyers.

Secondly, newspaper articles should give it a rest with their tiresome “Asian buyers are targeting Sydney’s lower north shore” shctick if they aren’t going to bother trying to back it up with any proof that the “Asian buyers” they so love to point the finger at are not Australian.

There are hundreds of of thousands of people in Australia of Asian skin colour and Chinese heritage who are as Australian as you, I, or anyone else. Labelling each and every one as an “Asian buyer” and collectively blaming them for increasing dwelling prices is silly nonsense.

Thirdly, there may yet be a story here about capital flight from China impacting Australia’s residential real estate, but if that is the case, then it surely – surely! – shouldn’t be very hard to drum up some evidence to back up the assertions?

We’ve all heard anecdotes about mystery trust funds or wealthy foreign buyers using friends and family to invest in Australia for them, but since all we have at the moment are anecdotes and hearsay, the results to date have included misreporting and misdirected anger.

I’m fairly sure there’s a story here for any investigative journalist willing to spend some time researching the facts thoroughly: find some non-residents who have genuinely rorted the system and report that.

In the meantime, yet further stories about “Asian buyers” I’m going to take with a pinch of salt.

[post_ender]



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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