Some facts about foreign property investors in Australia

Foreign ownership of Australian property has become a hot topic lately, causing controversy as property values keep rising across many of our capital cities.

Of course, there’s nothing new about foreign investment in Australia – it dates back to when we first became a colony and has continued ever since.

However, one theory frequently put forward to explain the high prices we’re currently experiencing, especially in Sydney and Melbourne is that the market has been flooded with foreign investors who fly in with wallets full of money and are willing to pay top dollar, locking out the locals.

Clearly there has been a new wave of foreign investment in Australian residential space and commercial property.

At the same time many foreign property developers (who use different funding models to local developers) have been buying up development sites outbidding local developers.

But do greedy foreign investors really push up property values?

Well firstly it’s important to understand that:

Australia has regulated the purchase of property by foreign investors, who need to apply to the Foreign Investment Review Board (FIRB) to gain permission to purchase real estate in Australia.

Their guidelines cover who can buy what:

• Non-resident foreign investors are not allowed to buy an existing home, but they can buy new homes and apartments or off-the-plan properties and vacant land.
• Foreign people living in Australia for no more than 12 months can buy one existing home, but they must live in it and sell it when their visa expires

While the FIRB has rules and guidelines regarding foreign investment, in general they look for investments that increase housing stock and create jobs in the construction industry.

Interestingly few applications are rejected and a parliamentary inquiry last year found the FIRB had not prosecuted a case since 2006.

What are foreigners buying?

NAB’s quarterly residential property survey released in October reveals that during the September quarter, 19% of all new apartments, and 14.9% of new homes, were purchased by foreign buyers, up significantly on the 16.1% and 11.5% levels recorded in the three months to June.

In Victoria, foreign activity was significantly higher than the national average. Over the quarter, foreign buyers accounted for 28.5% of all new apartments sold, and 26% of all new homes.

But what raised a few eyebrows was that despite stricter restrictions on foreign investment in the established residential property market, the NAB survey suggests that foreign buyers also accounted for a significantly high number of established property sales.

Are foreign investors really pushing up Australian property prices?

The simple answer is NO!

New research by University of Sydney Professor Hans Hendrischke has cast doubt on claims that foreign investment is pushing up Australian house prices, indicating offshore Chinese purchases totalled just 2% of all transactions in 2014.

This figure is so low that it would be hard to argue that foreign investment is driving the affordability crisis in Australian real estate.

Why we need foreign investment

The objective of Australia’s policy on foreign investment in residential real estate is to increase the supply of new housing.

And clearly it is doing this.

The wave of new property development, particularly inner CBD off-the-plan projects, has shored up our construction industry which stepped in to help our economy as the mining boom faded.

Without foreign investment many new building projects simply would not have been built as they were not financially viable for local developers.

Foreign investment has added to the supply of new housing and increases the supply of rental properties.

The downside of foreign investment

However, I see some longer term issues with the level of foreign invetsment:

1. Currently there is an oversupply of apartments particularly in the CBDs of Melbourne and Brisbane, yet foreign developers are still busy building more towers to fulfil the demand of their overseas clients, despite the fact that vacancy rates in these locations are rising
2. Many of the inner city apartments being built are small and of a poor standard and are likely to become the slums of the future
3. Many of the buildings have a high (almost 100%) predominance of investor owners, rather than owner occupiers. This is likely to create competition for tenants at a time that the particular demographic who rents these properties is diminishing
4. The oversupply of properties will stifle capital and rental growth for many years to come
5. The high prices for new properties being paid by overseas investors who are not familiar with our markets, are enticing some inexperienced local investors to also buy into these apartment buildings setting themselves up for disappointment in the future

Local Investors should be wary.

I’ve often warned against buying in locations or buildings dominated by investors.

It’s owner occupiers (who buy with their hearts more than their calculators) who push up property values.

Similarly locations or properties dominated by investors have the risk that as interest rates rise or sentiment turns (as it has in mining towns) they are more likely to sell en masse, lowering property values in that area.

I also see future problems with difficulty chasing overseas residents if they fail to pay their strata or owners’ corporation fees for the building’s upkeep.

The poor standard of construction could mean owners’ corporations could well run out of cash, and then you can see a scenario emerging where they can’t maintain the building to the standards required.

That could start a real slippery slide of other owners bailing out and a larger number of the units being on the market and prices then tumbling.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.