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GUEST OBSERVATION
A petition calling for tighter rules on foreign ownership of Australian property has over 26,000 signatures, highlighting public disquiet over foreign buyers, as reported by Sydney Morning Herald.
Chinese buyers are often the target of this, as they are visible at home auctions particularly in Sydney. Yet the Canadians are only just behind them.
So how big an influence are foreign buyers on the residential market? Available figures tend to be confusing and contradictory.
On 27 November the House of Representatives issued a report into the FIRB which was critical of the current compliance procedures, and highlighted how easy it currently is for overseas buyers to avoid the rules. 
It is recommending an overhaul of compliance procedures, in particular that the land titles systems in each state be amended to record the citizenship and residency of buyers so that we have accurate information on buyers and can monitor their compliance. 
Also, it recommends that substantial fines be introduced for non-compliance, and that any capital gains on a non-complying property be taken by the government. While it seems clear that the rules should be properly enforced, it will have no impact on the level of overseas demand.
According to the FIRB, foreign investors doubled their presence in the market in the last year, when they purchased 5,755 homes worth $5.5 billion at an average of $955,000 per property. There are two key points to make about this:
<ol>
<li>Last year, in our capital cities, there were a total of 309,124 residential sales. Foreign investors accounted for only 1.86% of all sales, hardly a dominant figure. </li>
<li>At an average of $955,000 per property, foreign buyers were generally in a price bracket above that of most domestic buyers, where the overall median price was $468,500. Put another way, foreign buyers purchase property that is twice the price of the typical domestic buyer.</li>
</ol>
Of course, foreign buyers tend to focus on certain markets, so their influence is disproportionately higher in Sydney inner suburbs, and Melbourne, though they are making inroads into the Brisbane market. They are broadly grouped into two types:
<ol>
<li>Foreign students can buy property while they are studying at university. Probably funded by parents, this market targets units in university catchment areas, and they can buy existing homes. Overseas families are also accused of using lawyers or other service providers as proxies to buy property, though data is not available. </li>
<li>Other foreign buyers are restricted to purchasing new property off the plan.</li>
</ol>
The new unit market appears to be oversupplied in major markets, and not surprisingly developers are supporters of the right of foreign buyers to purchase off the plan, without which a serious oversupply might be emerging.
Not all developers though. Those looking for sites to develop are finding themselves competing with Chinese property developers. Julian Heatherich of Savills’ Melbourne says that activity in development sites has become “a lot more aggressive” in the last year, while Lang Walker expressed concerns that Asian groups are paying inflated prices for residential development sites.
According to a NAB survey, investment in Sydney by foreign buyers is falling, but increasing in Melbourne and Brisbane. Other cities don’t get a look-in.
According to Simon Henry, co-CEO of Juwai, stripping out student units, the median purchase price by Chinese investors is A$1.5 million, way above most of the market, suggesting that Chinese buyers cannot be accused of pushing up prices for domestic buyers.
Preferences are for property close to the beach, in well-off suburbs, or apartments close to the centre of major cities, according to the New Daily .
According to property investor Andrew Crossley: “in Brisbane they are looking at Hamilton, Kangaroo Point and Bridgeman Downs; in Sydney they are focusing on Mosman, Bondi and Cremorne; while in Melbourne they are interested in Burwood, Doncaster and Ivanhoe.” He goes on to say that “local investors — those who are buying at the cheaper end of the market — have got more to do with pushing prices up than any foreign interests”.
Clearly, the influence of Chinese buyers is being felt, but in very specific markets; it is not across the board. According to the NAB residential property survey, overseas buyers accounted for 17% of total demand for new properties in Sydney in the September quarter, and almost 25% in Melbourne. Managing director of Momentum Wealth Damian Collins says: “They are buying into new apartments, not existing dwellings, so are not really affecting the residential market.”
The recent free trade deal with China will make it easier for Chinese investors to buy commercial real estate but it doesn’t change the rules for residential real estate. However the federal government is canvassing raising fees from overseas buyers and is considering a $1,500 application fee for every property they buy, from July 2015, said to raise $50 million a year. That implies 33,000 transactions a year, versus the FIRB figure of 5,755 transactions. The announcement seems more to do with being seen to do something about foreign buyers, for political purposes, than a serious revenue raiser.
The other recent political announcement has been the creation of a new visa category , to fast track permanent residency for wealthy foreigners who “invest $15 million in certain assets after 12 months”. Concerns have been expressed that this will drive up property prices, but the actual number of foreigners eligible is not likely to be significant.
The recent release of pre-sales for a new apartment tower in Melbourne, Aurora Melbourne , with 941 apartments, is a development by Malaysian developer UEM Sunrise. After two weeks, 895 units have been sold, 75% to overseas buyers, showing strong demand for new high quality apartment developments in Melbourne. It is the pricing relative to other cities in Asia that is cited as the prime attraction.
“As a benchmark in Australasia, Melbourne core CBD prices are on par with KL, 50 per cent cheaper than Sydney, 200 per cent cheaper than Singapore, 350 per cent cheaper than Hong Kong, and a staggering 550 per cent cheaper than London,” said Raymond Cheah, director of UEM Sunrise in Australia.
While the newspapers carry plenty of headlines about “foreigners driving up property prices”, the reaction tends to be xenophobic rather than factual. Certainly they are having an impact in certain inner city, prime and unit markets but the impact is minimal in most Australian markets.
Linda Phillips is head of research at <a href="https://www.propell.com.au/" target="_blank">Propell National Valuers</a>.
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LindaPhillips-Aic2YD9SM3

How much influence do overseas buyers really have?

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GUEST OBSERVATION
Federal Treasurer Joe Hockey has dismissed the idea that a property bubble is forming in Australia, citing the lack of supply as a primary reason for our high domestic prices.
This is an analysis that we, Propell National Valuers, agree with, <a href="/expert-insights/does-australia-really-have-the-most-overvalued-property-in-the-world">as set out in an article we published last month</a>.
The statement follows statistics published by the Bank of International Settlements (BIS) and The Economist showing that, as measured against income and rents, Australia had one of the highest relative price levels in the world (Only Belgium had higher prices.)
Joe Hockey called their surveys “lazy analysis”. We would agree that the reports are based on “rules of thumb” that are interesting but only have limited application. The same surveys showed Chinese prices as some of the cheapest in the world, but no-one is expecting Chinese prices to increase.
Anyone who wants to argue that Australia is in a housing bubble should also argue that Chinese real estate is at bargain prices, and no-one believes the latter to be the case.
BIS quoted Australia as having the largest price increase in the past year:
“Year-on-year residential property prices, deflated by CPI, rose by 9.5% in the United States and 6% in the United Kingdom. Real house prices also grew, by 7% in Canada, 7.7% in Australia and 2.2% in Switzerland, three countries that were less affected by the crisis, as well as in some countries that were severely affected by the crisis, such as Ireland (+7.2%) and Iceland (+6.4%).”
The BIS statement matches a recent article in The Economist (30 August 2014 edition):
“Australia has one of the most over priced housing markets in the world.”
However, this is based on a couple of simplistic measures, being price versus rents, and price versus income.
Measured against rents, they assert that Australia as a whole is 55% over valued, the only markets exceeding this being New Zealand, Canada, Belgium and Hong Kong.
Measured against income, they assert that Australia is 33% over valued, the highest figure in the world.
Given the disparity of price growth in our cities, this implies that Sydney and Melbourne are way overvalued, while the other capital cities are a little above fair value.
But is this an accurate way to measure under/over valuation?
Against income, The Economist says that Australia is 33% overvalued. But at the other end of the scale, they also say that China is 38% undervalued.
If we accept the logic that Australian prices are too high, then we would also accept that Chinese prices are too low. Yet the consensus opinion is that the Chinese market is oversupplied and that prices could fall.
Even Chinese buyers are conspicuous in buying Sydney real estate, indicating that they see better value in Australia than in China.
In a blog article last month we highlighted the major driver of prices: supply v demand. Joe Hockey is right to draw attention to the supply/demand equation in justifying the present level of house prices.
China may well be undervalued by comparison with incomes, but another factor is at work. The market is considerably oversupplied, with plenty of reports highlighting the amount of constructed yet empty apartment space in and around the major cities. So the excess of supply over demand has kept prices lower by comparison with incomes.
In Australia, we have the opposite equation: supply has not kept up with demand, and excess demand is driving prices up. To the extent that demand is supporting prices, there is a good argument to say that our prices are not too high.
Rising prices should be a signal to increase supply. Indeed, levels of new home construction are improving, but not at the pace that would reduce prices. Supply is relatively inelastic, with impediments to new supply including lack of available land (where it is wanted) and planning limitations.
This can easily explain why Sydney prices have been increasing at the fastest pace. Simplistically, the demand is for inner city housing, while supply is most elastic on the metro fringes. The lack of sufficient supply in Australia is a result of inelastic availability of land, plus, what land there is, tends to be at the fringe of cities, whereas demand is for residences closer to the CBD. Inner city suburbs are encouraged to increase residential densities but this often comes up against the NIMBY factor, existing owners oppose higher density developments in their neighbourhood.
On the demand side, our high level of immigration has the effect of increasing demand which cannot easily be satisfied. Immigration policy appears to be set without reference to the domestic ability to cater for their housing needs, but policies are unlikely to change in the short term.
So Australia remains in a position of having insufficient supply of residences. Prices may be high relative to rents, but at present interest rate levels the market continues to be supported by buyers and there is no suggestion of it being overpriced. If interest rates rise, then that would change the equation, but we are not there yet.
Linda Phillips is national research manager with <a href="https://www.propell.com.au/" target="_blank">Propell National Valuers</a>.
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Joe Hockey says bubble talk is "lazy", but is he right?

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GUEST OBSERVATION
Home median prices rose 4.2% over the quarter to 31 August according to RP Data and this is reigniting the debate over whether prices are now too high.
Price movements over the quarter were +5.0% for Sydney, +6.4% for Melbourne, but around +1% for the rest. It was a surprise to see Melbourne outperforming Sydney during the quarter.
More capitals now have a median price within a stones’ throw of $500,000 including Melbourne, Perth, Darwin and Canberra. Brisbane still looks relatively cheap at $445,000, with Adelaide and Hobart lower. Sydney is the most expensive at $650,000.
This was the strongest winter performance since 2007 says RP Data, though it followed a negative result in May so there is an element of bounce back in the numbers.
Over the year to 31 August, Sydney is up 20.9%, Melbourne is up 15.6%, Brisbane 10.4%, Adelaide 10.6%, Darwin 12.0%, Perth 8.0%, Hobart 8.4%, Canberra 6.0%. In the case of Canberra much of that happened in the last quarter.
Melbourne growth has been surprisingly strong, considering the plentiful supply and the level of new unit construction. It also has the lowest rental yield, being 3.2% on houses, 4.2% on units, which the Economist has used to suggest the market is overpriced (see below).
Over five years, Sydney and Melbourne prices have risen by around half.
According to RP Data research director Tim Lawless, Sydney and Melbourne housing markets are driving these two tier conditions. “Over the latest growth cycle we have seen Sydney dwelling values increase by 27.2% and Melbourne values up by 19.5%. Sydney and Melbourne were also the strongest performing cities during the 2009/10 growth cycle. Since the beginning of 2009, we have seen values rise by a cumulative 50.1 per cent and 46.1% respectively in Sydney and Melbourne. Looking at the remaining state capitals over the same time frame, the next best performer was Perth where values are now 15% higher, followed by Adelaide at 9.9%, Brisbane with 5.3%.”
The inevitable question is what prices will do in the next year?
It seems that the pace of growth must slow down. If it doesn’t then the RBA will be considering raising interest rates, assuming that macro prudential tools to curtail lending are not introduced. And this at a time when the RBA would like to reduce rates in order to lower the exchange rate and stimulate the economy. It is between a rock and a hard place.
According to an article in The Economist (30 August, 2014 edition):
<ul>
<li>Australia has one of the most over priced housing markets in the world. However, this is based on a couple of simplistic measures, being price versus rents, and price versus income.</li>
<li>Measured against rents, they assert that Australia as a whole is 55% overvalued, the only markets exceeding this being New Zealand, Canada, Belgium and Hong Kong.</li>
<li>Measured against income, they assert that Australia is 33% overvalued, the highest figure in the world.</li>
</ul>
Given the disparity of price growth in our cities, this implies that Sydney and Melbourne are way overvalued, while the other capital cities are a little above fair value.
But is this an accurate way to measure under/overvaluation?
Against income, The Economist says that Australia is 33% overvalued. But at the other end of the scale, they also say that China is 38% undervalued.
So should we be selling our Australian houses and rushing to buy in China instead? Few would agree with that, indeed, Chinese buyers are conspicuous in buying Sydney real estate, but the question gets us to focus on the major driver of prices: supply versus demand.
China may well be undervalued by comparison with incomes, but another factor is at work. The market is considerably oversupplied, with plenty of reports highlighting the amount of constructed yet empty apartment space in and around the major cities. So the excess of supply over demand has kept prices lower by comparison with incomes.
In Australia, we have the opposite equation: supply has not kept up with demand, and excess demand is driving prices up. To the extent that demand is supporting prices, there is a good argument to say that our prices are not too high.
Rising prices should be a signal to increase supply. Indeed, levels of new home construction are improving, but not at the pace that would reduce prices. Supply is relatively inelastic, with impediments to new supply including lack of available land (where it is wanted) and planning limitations.
This can easily explain why Sydney prices have been increasing at the fastest pace. Simplistically, the demand is for inner city housing, while supply is most elastic on the metro fringes.
Melbourne is something of an enigma. It has plentiful supply of new land and home packages, especially in the west, and the level of new apartment construction for inner city locations is high enough to cause a lively debate about whether too many are being constructed. If supply is greater than demand, then Melbourne price growth should be subdued. The fact that it continues at a strong pace suggests that demand is growing faster than supply.
Figures of population growth are always a year out of date, but it suggests that inbound population growth is continuing in Melbourne, despite the risks to employment levels in coming years.
Buyers seem to be assuming, reasonably enough, that interest rates are not going to change in the next year. Everyone likes buying into a trend, so growth tends to become self-fulfilling in the short term. While we expect growth levels to moderate in the coming year, we consider the measures used by The Economist to be rather simplistic and that prices are not as overvalued as they report.
Linda Phillips is national research manager with <a href="https://www.propell.com.au/" target="_blank">Propell National Valuers</a>.
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