Exclusive: What should be done about foreign investment in Australian real estate?
Foreign investment into Australian real estate has attracted more attention than almost any other housing issue in recent times.
Some believe that foreign investors are responsible for rising home prices. Others, like Malcolm Gunning of the Real Estate Institute of New South Wales, claim foreign investors are helping Australia’s economy.
Property Observer asked the experts, "What should be done about property investment from foreign buyers?"
Terry Ryder, Hotspotting.com.au founder
Nothing. There is nothing Australia needs to do about foreign investment in Australian real estate.
This is a non-issue. Foreign investment is a minor part of the total property buying landscape and is generally confined to high-rise apartments in the inner-city areas of the major capital cities, plus the Gold Coast.
The claim that they are pricing young Australians out of home ownership is quite ridiculous. Foreign investors (for foreign, read Chinese) are not buying in the same areas as typical first-home buyers. They buy prestige homes and high-rise inner-city apartments.
As I have commented in the past, some people have an issue with foreign investment but only when it comes from Asia. The last time this was an issue was in the 1980s when Japanese investors were active. Until recently, the biggest source of foreign investment in Australian real estate was the United States and no one had a problem with that.
The only step I would like to see taken on foreign property investors is to advise them that, in many cases, they are being sold dud real estate. Many are buying in the over-supplied inner-city markets of Melbourne and are likely to have a bad result. This could have repercussions for the wider market, as rents are likely to fall and prices may follow.
Shane Oliver, AMP Capital chief economist
There’s less of an issue than many think. There probably are issues around it. And it’s right, I think, to look into whether it’s too easy for wealthy foreign investors to buy into our property market, but never live in the property, but never rent it out.
I think it’s grossly overstated. These things seem to come up every time there’s a surge in property prices, and Australians like to look to rich people or foreign buyers as a cause.
It seems to me that we’re seeing a pretty normal cycle. Prices were low, interest rates are low, people go to the bank to borrow some money, the banks lend them money, they buy houses, prices go up.
If those things hadn’t happened, if we hadn’t seen the normal cycle dynamic and it was all foreign buying or SMSF [Self Managed Super Fund] buying, then I’d be concerned. But prices are picking up in places where there aren’t foreign buyers.
The bulk of Chinese buying is concentrated in particular suburbs. It tends to be in ritzy areas – in Sydney’s it’s the lower north shore and the eastern suburbs.
And they’re not the places where first home buyers are.
I think there’s a case to look at it, to see if it’s too easy. We have arrangements in Australia where we seem to encourage investment in our assets as a way to gain entry to Australia. So we need to see if those lead to a distortion in our property market.
The chief policy focuses to help the property market should be to decentralise our cities and our population, and to make land more freely available for development.
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Andrew Wilson, Domain Group senior economist, 2UE's The Property Hour expert
Much media attention has been directed recently to the level of foreign buyers of Australian real estate – particularly in regard to the Sydney housing market.
Sydney has experienced decade high prices growth the over the past 12 months as record low interest rates have improved affordability, released pent-up demand and activated investors chasing the re-emergence of capital gains.
The drivers of strong prices growth in Sydney and other capitals to a lesser degree have clearly been local changeover buyers and investors rather than has been suggested in some quarters, activity from foreign buyers, particularly from China.
The foreign investment rules are clear - investment in established residential real estate is restricted to those with some form of residency status and therefore by definition not foreigners. Foreigner investors may only buy new property or property that must be redeveloped as new within strict guidelines.
Foreign investment in new residential real estate however is a positive as it adds to the stock of housing which is a benefit in particular for the Sydney market where relatively high prices are a product of an underlying shortage of housing. And temporary resident students who purchase residential real estate add to local economic activity directly through the payment of tuition fees and indirectly as consumers.
Latest FIRB statistics reveal the small scale of foreign investment in Australian residential real estate with 11,668 transactions over the 2012-13 financial year which accounted for just 2.7 percent of total sales over that period.
Andrew Taylor, Juwai.com co-chief executive
I think the debate about foreign investors is really misplaced anxiety about insufficient supply. I met a woman recently. She was Australian born, of Chinese descent. She told me that when she was property hunting, she got nasty looks at auctions from other buyers. Is that the kind of Australia we want to live in?
Here are the three facts that matter. First, the RBA says that foreign investment creates new housing supply for Australians, by making new construction possible. In a market that has long been starved by a housing shortage, that’s great news. It suggests if we are really worried about affordability, Australia needs more foreign investment, not less.
The second fact is that foreign investment in Australian real estate is actually plummeting. It fell by 18% between 2011 and 2013. That's according to the government's own statistics. What’s wrong with Australia that would cause almost one fifth of foreign investment dollars to abandon the country?
American, Singaporean and British investors all cut their investment by half or more. Among the top overseas investors, only the Chinese have not abandoned Australia. Without the Chinese, foreign investment in Australian property would be lower, supply would be lower and prices would be higher.
So, what should be done about foreign investors? We should welcome them into our country because they make more housing available and thus hold down prices for first home buyers.
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The following is Patrick Bright's submission to the senate enquiry into foreign investment.
Patrick Bright, EPS Property Search Director
I own a Sydney based real estate buyer’s agency, which has been operating since 2001. Over the last 13 years I have represented hundreds of clients and purchased more than $500 million worth of property for home buyers and investors.
As an Australian citizen I am greatly concerned about the current FIRB policy.
It allows foreigners to purchase:
• up to 100% of a new development that has FIRB approval;
• as many new properties as they like;
• established housing with few restrictions.
The question must be asked as to why the government has a policy in place that effectively imports additional pressure onto our housing market when the Housing Industry Association statistics consistently show that Australia has an undersupply of housing to meet the current demand which is already contributing to strong price rises.
The two main concerns I have with the current policy are that it's inflationary and that it will create a generation of renters which will result in other knock on social issues down the track.
There is no doubt that under the current arrangement we are seeing prices being pushed up higher and faster than they otherwise would be without foreign buyers thereby creating an inflationary effect; this is particularly evident in my home town of Sydney however statistics clearly show it’s happening in other states as well. Over the past decade, in particular since 2008 when the FIRB laws were changed to their current state, I have experienced increasing competition as a result of foreign buyers in the real estate market when buying established property.
The National Australia Bank Quarterly Australian Residential Property survey statistics on foreign investment clearly correlate with my experiences with results consistently showing an increase in foreign investment. The latest quarterly survey released in April this year found “A big pick up in foreign buying activity was noted in the market for new property (especially in Queensland) and for established housing (especially in NSW). In terms of total demand, foreign buyers now account for just over 1 in 7 new properties and around 1 in 10 established homes.”
As a nation we have prided ourselves on giving all Australians a fair go. In contrast this current situation is pricing many would be Australian home buyers and investors seeking to secure their future out of the market. It is forcing many to rent now who would otherwise like to purchase and I strongly believe this has already started to increase the percentage of generation X and Y who will never buy a property diminishing for many the great Australian dream of owning their own home.
The flow on effects of the current policy must also be examined as we are likely to see a larger percentage of these generations become far more financially dependent on the government come retirement having not established the financial security of buying and paying off their own home.
Financial modelling for self funded retirees or retirees who need to rely on the age pension has the assumption that they have paid off their home. If they are still renting then it's likely they will require an additional million dollars in super or other investments (be that cash, shares or property) to fund their rental costs, for the rest of their lives. If they don't then it’s highly likely they will be dependent on some form of government housing or additional government financial support to pay their rent.
It's well understood that once families are dependent on welfare it often becomes generational. Clearly more people being dependent on Government financial support is not in Australia's short or long term interest.
My recommendations for adjustments to the policy are that:
- The percentage of property allowed to be sold to foreigners must be reduced to a less inflationary level of under 10% for each individual new development
- Limits need to be put in place as to how many properties any given individual foreigner or corporations that are controlled by or have common foreign shareholders can purchase.
- Remove the ability for foreigners to be able to purchase established property as this does not add to the housing market or boost the construction industry in any way, it just increases competition for Australian citizens and permanent residents.
These improvements would still allow for some degree of foreign investment. It would also give Australian citizens who just can’t compete with wealthy foreigners the opportunity they deserve to enter the Australian property market as a home buyer or as an investor seeking to secure their own financial future so they will be less dependent on government when they retire.