Debunking misconceptions: The problem with housing supply is government, not foreign investors

How foreign investors really created Australia's housing crisis.

Some commentary in the media suggest that's the case, but recently Tim Reardon, the Chief Economist at the Housing Industry Association (HIA), offered a different perspective that challenges these common misconceptions.

Misconception 1: Foreign investors leave homes vacant

It's a popular belief that foreign investors are buying up properties only to leave them empty, exacerbating the housing shortage.

However, Reardon clarifies that the vacancy figures often cited are misleading.

According to the Australian Bureau of Statistics, the consistent 10% vacancy rate during each census since 1986 includes homes temporarily unoccupied due to holidays, renovations, or being on the market — a pattern common in developed economies and not unique to Australia.

Furthermore, the notion that these homes are deliberately withheld from the market is a misconception.

Reardon argues that the real issue lies in government policies, particularly the increase in taxes on new homes, which he believes does not address the actual causes of housing shortages but rather compounds them.

Misconception 2: Foreign investors buy established homes

Contrary to popular belief, the "Foreign Acquisitions and Takeovers Act 1975" strictly limits foreign ownership of established homes, requiring approval from the Australian Treasurer.

In the 2021/22 period, only 0.23% of property transactions were approved for foreign buyers, underscoring the minimal impact they have on the overall market.

The role of foreign investment and the taxation dilemma

Far from harming the housing market, foreign investors play a crucial role in expanding housing supply.

Since the introduction of punitive stamp duties on foreign-built homes, there's been a noticeable retreat from the Australian market, with apartment construction dropping significantly.

This withdrawal has had a substantial impact, particularly in capital cities where new apartment starts have halved since 2016.

Reardon points out a simple economic principle: taxing something typically leads to less of it.

The $2.65 billion raised from taxing foreign investors could have instead fostered additional housing investments.

The current tax policies, he argues, are counterproductive, deterring the very investments that could alleviate Sydney’s severe housing shortage.

Looking forward

The solution, according to Reardon, lies in attracting more investment in home building from both domestic and international sources.

This involves not only refraining from further tax increases but also reducing regulatory burdens and supporting local councils in infrastructure development.

Although last year’s Federal Budget aimed to encourage domestic investment in housing, it has yet to compensate for the gap left by foreign investors' exit, which continues to exacerbate the rental shortage.

About Joseph Ballota Joseph is a Property Coach who put hundreds of people on the road towards wiping away their mortgage in under 5 years through expert Property Investment Plans.