We have a problem with Chinese property buyers (but it's not what you think it is)
GUEST OBSERVATION
Foreign investment is one of Australia’s biggest media issues in residential real estate at the moment. As a professional property buyer, I hear people saying:
- “Every time I go to an auction, I get beaten by a foreigner.”
- “These people can’t have that much money, there must be something illegal happening”
- “Why are they winning every single auction?”
The ‘elephant in the room’- what we are not comfortable saying - is that when we say foreign, we are talking about the Chinese property buyer. I don’t think people would feel as aggrieved if that buyer was from Italian descent, Lebanese descent…or, even more recently, of Indian descent. It is Chinese buyers people seem to have a problem with. But is there even a problem in the first place?
I would like to explore the issue by going straight to the Foreign Investment Review Board (FIRB) website and seeing how they address this from a policy position. The FIRB says:
“It is the government's policy that foreign investment in residential real estate should increase Australia's housing stock. That is, the policy seeks to channel foreign investment in the housing sector into activity that directly increases the supply of new housing (such as new developments of house and land, home units and townhouses) and brings benefits to the local building industry and its suppliers.”
That’s it. That’s our policy – bottom line. The rules are designed to allow overseas buyers to support the building of residential property in Australia. They aren’t designed to allow overseas purchasers to buy into existing and established Australian property. After all, we already know that Australia has a housing shortage of between 200,000 and 270,000 homes at any given time.
The Foreign Investment ‘No Overview At All’ (Operating in the Dark) Board
A second question is whether the FIRB is able to police its own rules. In a recent article in the Sydney Morning Herald, journalist Gareth Hutchens writes:
“Senior Bureau of Statistics officials have admitted they read trade magazines and newspapers to keep on top of changes in the amount of foreign investment in Australia's residential property, because their collection of such data is too patchy.”
At the same hearing - Paul Mahoney, an ABS assistant statistician, said they actively researched newspapers for information on foreign purchases of residential property, even though they knew the practice was ''a bit hit and miss''. But, in his words; “it had to be done... because the ABS gathered very little data itself”. Really?
Wouldn’t that be like me trying to be a talent scout for the Australian cricket team reading the back page of the local paper to find my next big talent? Efficient? Surely not.
This admission came during this public hearing , where the hearings are being held in response to industry concerns that foreign investors, particularly Chinese, have been sidestepping our laws to buy established property over locals and inflating prices to a stage beyond affordability.
At this same enquiry, Brian Wilson (from the FIRB) said:
“Much of the public controversy about Chinese investors buying up residential real estate was “not necessarily malevolent” but not based on facts”
But how Mr Wilson say this? Clearly he doesn’t have the facts, as the FIRB’s own reporting indicates.
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Legitimately Illigitimate?
Personally, I am not against foreigners, or specifically, Chinese buyers, buying established property in Australia. Chinese buyers are buying property in Australia via their local citizens, who may just happen to be relatives, friends and even business colleagues. As a matter of fact I have purchased and assisted in the purchase of many, many legal Australian citizens - some of whom may have raised the funds for their purchase via families and friends overseas. I can’t validate where the money is coming from, but I can say that:
- As much as this is explained to me, it would be considered rude in Chinese custom to expect to sign an agreement between parties (let say it is a family and friends ‘collectively’ pooling money) that would validate any formal agreement. Trust is an important virtue.
- The internal belief within China is that the government is currently addressing corruption and modes of money mobility. Whether rumour or fact – the population that has access to disposable money for investment believe that the opportunity to move money out of China will be more difficult in the future. As such, they are taking advantage of this now – and any ‘premium’ they are seen to be paying for a property can be considered the cost of ‘doing business’. A ‘tax’ even.
Having come from an Anglo-Saxon background myself, the fact that Chinese people have an established such trust and understanding with their families back home should be considered a source of strength. Culturally, if I could be provocative, I think that is something we could all learn from. The fact that they decide to build their wealth outside their mother country should be considered a compliment to the value of property in Australia.
In a global economy, where we are prepared to compete on almost every other economic level, including labour, we should not deprive those people (who can afford) it of our land. They are one of our closest neighbours and, in my opinion, it’s inevitable anyway. The problem that I have is that to be told by our powers that be that they are looking into the problem and can’t see a problem. It seems like a great case of them putting their head in the sand. I am not so much concerned about the non-problem, but I am concerned about the lack information obtained by the FIRB.
As to the question of local buyers feeling as if they have missed out.
If you follow the way a property purchasing ladder works, you’d see that for all the noise created by the emergence of the Chinese buyer – the reality is that the successful Chinese buyer only wins the property by one dollar or $5000 in the case of a property auction. Only a fool would pay more. It could even be true that the next one, two or even three under bidders might have been Chinese bidders too…but, in my experience, this rarely adds more than a few thousand dollars at best and perhaps one or two percent of the property price (at worst). Remember, when someone wins an auction, they only win by a margin ‘just’ higher than the next highest bidder.
It’s called the ‘purchasing pyramid’, with a fundamental base always supporting the underlying value with fewer and fewer buyers bidding prices up, until you have a winner. Take the top dog away, you’ve still got a good price. Believing that Chinese buyers fill the whole pyramid, or at least even the top part of that pyramid, is not only foolish, it’s incorrect.
The claim that it is adding 5,10 or 15% to our established property prices just isn’t true and therefore so are claims that it is changing the face (and fundamental price) of our market.
The Chinese Dragon is Here to Stay
It’s true that the Chinese purchaser is aggressive and has a mindset of ‘needing’ to buy into Australian property, but I think this is borne out of their doubts they have in the Chinese regulatory and economic system. For what it’s worth, I don’t think this problem is going backwards. Although, it doesn’t yet add a valid percentage to our property prices, I’d be naive to think that that over time it wouldn’t. As the amount of buyers forming our ‘buying pyramid’ become more significant, the growth this can afford property might be distortive to normal market rules.
I don’t think this foreign investment currently is the problem other people think it is. I am delighted foreign investors are acknowledging the value of our property.
But we should at least have an FIRB awake to the conversation about how it is happening. Firstly, what is the point of the FIRB otherwise? Secondly, what about when it does become a problem.
The method of purchase by the Chinese market is via consortiums. They are the oldest, most unsophisticated and perhaps the most basic consortium that you could ever find - the family. These family ties aren’t the type of ties that can be broken with rules from an institution like the FIRB.
My advice to Australia is to get used to it. The Chinese buyer is here to stay. My belief is that they are buying established property and there isn’t a law in the land that can stop it. My opinion is that I wouldn’t want a law that could!
GAVIN MCPHERSON is the CEO of Oasis Property and author of Value Investing in Property: What would Warren Buffet do if he was investing in property in Australia?