Increased foreign investment in Australian residential property: The pros and cons

Foreign residential property investment is arguably the hottest topic in Australian property circles right now.

Whether it is at a BBQ, dinner party, or casual drinks after work, when the topic of ‘house hunting’ or property pops up shortly after the topic of foreign investors gets introduced.

Prime Minister Tony Abbott has declared Australia is ‘open for business’ and this sentiment has certainly extended to foreign investment in our residential property class.

Though foreign national investment in single family homes, apartments, and units has been a common occurrence for years in this country, there has been an undeniable upswell in foreign investor-purchased property in the six months of 2014 thus far.

So is this a good thing or a bad thing?

Though market commentators and economists are divided on whether the influence of large waves of foreign investors are having a positive or negative effect on the residential property market, foreign investor influence is certainly being felt in capital city markets.

However, unlike other commodities and investment classes that foreigners ‘can’ buy into in this country, residential property is a delicate asset class; unlike gold, shares, natural resources, technology, and even commercial/industry property investment, residential property investment has social and societal consequences, not just economic ones.

Positive: Investors bring wealth into Australia

Foreign investors bring new money into Australia, greatly influencing our economy. This investment can return dividends for our wider economy as it stimulates further growth into our cities and potentially a better quality of services.

Negative: Higher foreign investor demand could artificially ramp up prices and drive overall housing unaffordability

Yes, this is cited by most Australians who complain about foreign housing investors. Though many Aussies may form this view based on hearsay and/or a lack of researched opinion, the truth is they may be right. The city of Vancouver in Canada is a perfect case study of this. Canada’s relaxed ‘Immigrant Investor Program’ was introduced back in the 1980s and basically enabled for a wealthy foreign national to ‘buy’ their way into becoming a Canadian national, simply by investing a fairly small ($800,000) loan to the Canadian government. The government would then pay back the investor over a five year period and issue a visa in return.

Many of these people purchased investment property specifically in Vancouver, and then left again. However, the buying frenzy over many years saw Vancouver become one of the least affordable cities to live in in the world; with residential property becoming hugely unaffordable for median-to-above-average Canadian income-earners who lived there. The tap was turned off however, in 2012 when the program was abolished. There are concerns by Australians that a similar approach could happen here. 

Positive: Our construction industry gets a much needed boost

Our construction industry – which collectively and peripherally employs over one million Australians – benefits immensely as new residential estates and apartment buildings are demanded by investors, construction companies are employed to build them, thus creating jobs and stimulating the economy. 

Negative: Money laundering on a global scale?

Though Australia welcomes foreign cash injection into Australia, foreign investor funds into residential property are usually pretty unregulated. With a number of investors simply paying cash outright for developments off the plan, the developer takes the cash on a ‘no questions asked’ basis.

The lack of paper trail means that Australia runs the risk of accepting funds that could be ‘dirty money’. Once word gets out of the ease with which funds can be routed into residential properties, Australia runs a risk of an upswell in corrupt foreign funds entering the country. 

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Positive: City planning ensures that construction projects get approved in highest-demand areas

Several cities such as Sydney have faced residential property undersupply issues in their highest demand suburbs and working nodes for years, and foreign investment could help resolve this. Local council areas will consider medium and high-density planning applications by developers in much-needed areas that may not have been possible had there not been enough foreign investor interest to get the project off the ground. Foreign investment helps to encourage construction of higher density housing in these areas to meet current demand. 

Negative: Not everyone wants to live in a shoebox

It is a good thing that foreign investors are helping to build high-density housing (apartment towers) where they are needed most. In high-demand suburbs not everyone wants to live this way.

Developers can make higher profit margins on towers of this scale, versus, say, single-family homes with yards. As land increasingly becomes the prize commodity, developers are under pressure to effectively fit as many people on to the smallest parcel of land that they are legally allowed to do. However, not everyone wants to live in high-rise apartment buildings. 

Positive: Foreign investor demand in certain areas may result in much-needed rezoning

This rezoning could be in the interest of all; and could help open the floodgates to encourage greater provisions of services in much needed areas; things like improved road works, more schools and hospitals being built, and greater stimulation for small businesses to enter areas where higher population growth has been earmarked for. 

Negative: A more expensive property market can cause house-crowding

Many factors contribute to house and unit median prices increasing – foreign investors are just one of them. However, any contribution to making high-demand property exponentially more expensive for occupants could result in house crowding; or worse, illegal housing facilities being built.

A recent example is the Alexandria, NSW, fire that revealed an illegal housing ‘shanty’ facility, which endangered the lives of dozens of people illegally living in squalid conditions. This, in an inner suburb area of Australia’s biggest city.

I’ve written previously about house and apartment crowding and this trend is only on the up. Beyond the immediate safety problems of cramming, say, 10 people into a two bedroom apartment, are the drain on local services and council facilities.

This is where foreign investors could be contributing to making high-demand properties more expensive from the outset, and for a portion of urban Australians such as students, new arrivals/immigrants, and low-income earners, overcrowding; whilst not an attractive option; may be an option they resort to, if they cannot afford the rent on their own. 

Positive/Negative: How much does our economy and society really benefit from foreign national property investors?

A number of news outlets have reported on foreign investors paying cash for their properties and leaving them untenanted/vacant most of the time. I have not been able to find sources that verify this as being a significant occurance/portion of foreign investors; however, there is risk of this occurring more in the future could grow.

If an investor is not using a local (Australian) bank to finance the purchase; and then leaving the property vacant for much of the year, this is a bad thing both economically and societally. Yes, the property investor may pay their dues in the form of council rates and so on, however, with vacant properties in high-demand areas it does little to ease any supply/demand shortfall currently being faced.

Negative: Councils get greedy for revenue, at the expense of citizen quality of life/services

This one is less a finger pointed at the foreign investor more so than it is the greed of some local councils back home.

As mass-scale property developers, themselves fuelled by the lure of foreign investors with very deep pockets quite willing to pay ‘asking price, and above’ for their giant unit blocks; present their plans for submission to councils; the councils themselves are hard-pressed to say no.

This can result in council areas approving higher housing density than perhaps they have the true infrastructure to actually handle. In other words; the lure of developer revenue is too great, at the expense of quality of life and sense of community for the inhabitants of the area.

Councils do this because they believe that the revenue generated by mass development will be used to provide better services to their area. The problem is, most councils under cook the true cost of these services provisions in the first place, or worse, they re-allocate the funds they receive from the developer somewhere else, before the development is complete.

This then sees a suburb increase enormously in population, without the infrastructure and investment in things like community programs, parks, public transport, and local commerce, provided. Burwood, NSW, is a good example here.

The Sydney suburb has a very relaxed local government, and is hungry for the foreign-investor-driven high-rise developments to be built there, yet the council is plagued with a backlog of infrastrucutre items it cannot possibly afford.