Treasury Modelling Suggests Foreign Property Investors Have Only Small Impact

The Treasure released a working paper today – “Foreign Investment and Residential Property Price Growth“.  This paper explores the relationship between foreign investment in Australian residential real estate and property prices.

wolli-buildingThey take the number of foreign approvals (with exceptions), and look, at a postcode level for differences in purchase price, between those with high foreign transactions, and those will little or none.  They conclude that the increase in prices attributable to foreign investors is small when compared to the average quarterly increase in property prices of around $12,800 in Sydney and Melbourne during the study period. Across Sydney and Melbourne, for a typical postcode, foreign demand increases prices by between $80 and $122 on average in each quarter. Almost nothing.  We were not convinced.

The number of foreign investment approvals has trended up in recent years, which has coincided with strong property price growth in many parts of Australia. While domestic buyers make up the vast majority of demand for property, it may be the case that, at the margin, foreign buyers are affecting property prices. This is because the stock of dwellings is relatively fixed in the short run so any increase in demand, whether from domestic or foreign sources, would be expected to result in higher prices, at least until increased prices have provided an incentive for the construction of additional supply. In the longer term, the high level of house prices in Australian capital cities, relative to those in other countries, likely reflects supply constraints. These constraints include state government land release and zoning policies, infrastructure provision and local government development approval processes.

Australia’s policy for foreign investment in residential real estate aims to increase Australia’s housing stock. As such, applications from  non-residents to purchase new properties are usually approved without conditions, but non-residents are prohibited from purchasing established dwellings. Temporary residents can apply to purchase one established property to use as a residence while they live in Australia. The majority of approvals have been granted for investment into new, as opposed to existing dwellings. This suggests that foreign demand is being channelled into increasing the property supply as intended. While some commentators have argued that foreign demand is pricing out first home buyers, it is not clear that this is the case. The number of foreign investment approvals granted for new properties is especially noteworthy given new properties make up a very small proportion of the total number of properties in Australia and because first home buyers tend to buy established properties.

In recent years the level of foreign demand for Australian property has increased strongly. This has been driven largely by increasing applications from Chinese nationals, which rose from around 50 per cent of total foreign investment approvals in mid-2010 to around 70 per cent in early 2015. The increased importance of Chinese demand to Australian real estate increases Australia’s exposure to factors affecting the Chinese economy. Further, any change to the relative attractiveness of holding assets outside of China or ability to do so will likely affect foreign demand for Australian property, which may have domestic economic and financial implications.

Over the period of this study, foreign investment in residential real estate has been concentrated in Melbourne and Sydney (Chart 1).

for-tres1But despite Melbourne receiving more foreign investment approvals than Sydney, price growth in Sydney has been much stronger than in Melbourne over the period. As such, it is difficult to directly attribute price growth in Sydney to foreign investors alone. Other factors, such as the relatively low number of building approvals, commencements and completions in the late 2000s are potential longer term drivers of the recent price growth in Sydney.

To estimate the sensitivity of property prices to changes in foreign demand we develop a fixed effects model of postcode level price growth using foreign investment approvals data from the Foreign Investment Division of the Treasury as the main explanatory variable.

Despite these shortcomings the data from the Foreign  Investment Division at the Treasury is preferable to alternative measures of foreign investment in residential property. These alternative measures, such as from the National Australia Bank, are problematic because they are based on survey data from
industry participants and it is not clear how these industry participants determine whether property buyers are foreign.

Under almost all model specifications there is a statistically significant and economically meaningful relationship between foreign investment approvals and property price growth, but the majority of price growth experienced in recent times does not appear to be attributable to increased foreign demand. Instead, the fact that property price growth has been strong over an extended period is likely to have been primarily driven by other factors such as impediments to supply, especially in some regions where natural and human-imposed constraints on supply are especially limiting.

The increase in prices attributable to foreign investors is small when compared to the average quarterly increase in property prices of around $12,800 in Sydney and Melbourne during the study period. Across Sydney and Melbourne, the models which we consider to be the best specified indicate that, for a typical postcode, foreign demand increases prices by between $80 and $122 on average in each quarter. This is based on the average postcode in these two cities receiving around 0.6 more foreign investment approvals each quarter over time. Further, for each additional foreign investment approval beyond this typical increase of 0.6, median property prices are estimated to rise by between $145 and $222.

Given that the typical increase in the number of foreign investment approvals from one quarter to the next in Sydney and Melbourne is only around 0.6, one additional foreign investment approval beyond this trend increase would be a relatively large spike in the number of approvals. As such, it can be seen that foreign demand has accounted for only a small proportion of the increase in property prices in recent years.

While the results of this study show a consistent, but small positive relationship between foreign investment approvals and property price growth, there are some limitations. This includes the data limitations set out in Section 3, particularly around compliance and that the data reflects intentions to purchase and not actual purchases. The foreign investment data also may not pick up purchases by a citizen or permanent resident on behalf of family members overseas. Quantifying the effect of these limitations is difficult. It is also important to note that while the results suggest the impact across Australia and the capital cities is small, the impacts in certain areas or at particular times may be more intense.

Whilst we applaud the Treasury for trying to bring science to this complex issue, we think there are fundamental flaws in the analysis, which devalues the conclusions significantly.

First, we think the modelling needs to look at total demand, at a post code level by purchaser type. We know from our own surveys, demand varies significantly driven by mix of prospective purchasers. In some locations, – for example Wolli Creek, we see high demand for foreign purchasers, first time buyers, other property investors and down traders – demand is outstripping supply, and here investors are outbidding first time buyers. This is the point, supply is not uniform, and therefore the pricing equilibrium will be quite different in individual locales. Reading their method, we think this is a significant issue.

Second their measure of foreign demand is the number of foreign investment approvals. This data are sourced from the Foreign Investment Division at the Treasury and it not available to the public, so the data cannot be validated, or independently reviewed. Recent inquiries however have called into question the accuracy of the approvals data. It likely understates the volume.   Why not release the data, so we can judge?

They did not include data on advanced off-the-plan foreign investment approvals, nor price data from off-the-plan sales from such developments. We believe that this is likely to miss bulk approvals from developers who, at a single application, and approval gets multiple property transactions approved.

They make the point that foreign investment approvals are concentrated in a relatively small number of postcodes — more than three quarters of postcodes receive less than one approval every three months.  Approvals do not represent actual purchases. For example, a foreign person may receive a foreign investment approval but later decide not to purchase a dwelling. No data are available regarding properties sold by foreigners. As such, the foreign investment data are an indication of gross foreign demand not net foreign demand. For instance, if a property is sold by one foreign person to another, there is no net change in foreign demand for
dwellings but an additional foreign investment approval will be recorded.  It is unclear when an approval for foreign investment will be acted upon because the approval is valid for 12 months. However, anecdotal evidence suggests that in most cases approvals are acted upon soon after being granted. In some cases an approval may be sought shortly after a
contract is entered into but before the conveyancing and settlement period is finalised. As such, they consider leading and lagging relationships in the Results section. This yields some insights into the behaviour of foreign investors.

Foreign investment approvals data do not distinguish between houses and units, so in postcodes with price data for both houses and units, they aggregate prices for these two property types. Specifically, this aggregation is weighted by the proportion of houses and units in each postcode. In postcodes where no price data are available for a particular property type at any time — for example, units in a regional postcode — but price data are available for the other property type — for example, houses — they use the available price data as a measure of postcode
level price.

They do not control for changes in the quality of properties in each postcode through time. We do not consider this to be a major limitation because of the relatively short time period of our study. However, the lack of hedonic adjustment could be problematic where price data are derived from a small number of sales. That is, where postcode level property markets are relatively illiquid and the quality of transacted properties changes through time even though the quality of properties in the postcode more broadly does not change.

So, we conclude this exercise may generate some heat, but we are not sure it casts light on the real issues surrounding foreign buyers. The data limitations and surrounding processes need to be improved if we are to get a handle on the true story.

 

 

Changes for off-the-plan foreign buyers rely on a broken supply argument

From The Conversation.

The government is proposing changes to the foreign investment framework that will allow a foreign real estate investor to purchase an off-the-plan dwelling when another foreign investor has failed to reach settlement.

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In announcing the changes, Treasurer Scott Morrison deployed a familiar narrative about foreign investment increasing housing supply and making “housing more affordable for more Australians”.

This idea is in keeping with property development lobbyists, who are focused on getting government to release more land to solve the complex long-term housing affordability problem in cities.

However, researchers have debunked this idea before (see here and here). Their conclusion is that government cannot supply its way out of the housing affordability problem in major Australian cities.

The government’s focus on the concerns of the property industry renders invisible a broader set of interested parties and a much more nuanced suite of contributing factors and solutions.

The current foreign investment rules are a blunt set of regulatory tools, held captive to the housing supply and global competitiveness debates.

Not all foreign real estate investors are the same

There are important differences between individual foreign real estate investors, which are regularly conflated in foreign investment policy and the public debate.

In broad terms, there are four investor groups. A class-based distinction defines people from the expanding middle class in countries like China. They are called the new middle class.

A disposable asset distinction, which excludes primary residences, separates the three remaining groups. High net worth individuals have disposable assets that exceed US$1 million. Ultra high net worth individuals have asset holdings in excess of US$30 million. Ultra, ultra high net worth individuals have a minimum of US$50 million in disposable assets in a wealth management fund.

In the absence of fine-grained data about which groups are investing and their differential impacts on cities and housing, the treasurer has opted to protect the development industry rather than the people and places within cities.

A regulatory environment that is sensitive to various investor groups is important in Australia because different investors impact their host cities in diverse ways.

Regulating foreign investors, sales or capital

How foreign capital intersects with local real estate markets depends on on who is investing capital, the properties in which the capital is being invested and the investment vehicles through which the capital is being transferred.

The arrival of foreign capital is not always accompanied by the arrival of new permanent residents for the city. Therefore, the investors interact with local infrastructure and shape housing supply in diverse ways.

There is a big difference between the impacts of new middle class and high net worth investors in cities compared to ultra and ultra, ultra high net worth investment.

Ultra, ultra high net worth individuals can be “free-floating” investors who travel around the world, purchasing real estate in various global cities. Rowland Atkinson argues this group has little allegiance to the host neighbourhoods.

Ultra high net worth investors might move between multiple residences and have attachments to the neighbourhoods their properties are in. The new middle class and high net worth investors might live in, or send their spouse and/or children to live in, the house they have purchased. They often have an allegiance to the cities or neighbourhoods their properties are in.

The personal motivations of foreign investors are important too. They can extend far beyond financial considerations.

An exhibitor of luxury properties in Spain speaks to a potential investor during the Luxury Property Showcase (LPS) Beijing. Ultra high net worth individuals can shop globally for investment properties. HOW HWEE YOUNG/EPA

Foreign investors are motivated by the opportunities that exist in Australia and how these relate to their own migration plans, their children’s education and the financial security that Australian real estate supposedly guarantees.

Therefore, who is investing and their residency status will shape the neighbourhood, city and perhaps even the country into the future.

Neighbourhoods with high concentrations of ultra high net worth investors in London appear to be (or may be) devoid of people. Local businesses in these suburbs have become untenable as local patronage declines.

New middle class and high net worth investors might change the social fabric, educational institutions or employment landscape of a neighbourhood or city through habitation, for good or ill.

International evidence shows that some investors will occupy their property, others place it on the rental market, some buy multi-million-dollar trophy homes, while others increase the housing supply in a neighbourhood of absentee owners and fading businesses.

Therefore, the impact of foreign investors on housing supply is related to the investment practises of each investor, the amount of capital they bring into Australia and how they invest it.

More dynamic foreign investment rules needed

Housing supply and global competitiveness arguments have captured the foreign real estate investment debate. Both are too simplistic and need to be augmented with additional voices, policies and data.

Governments justify their pro-foreign investment and business immigration policies through “financial benefits” arguments in times of prosperity and “economic necessity” arguments in times of hardship.

These top-down narratives position foreign real estate investment as good for the local economy, with secondary benefits such as increasing housing supply and jobs growth through targeted skill migration and business development.

The government needs to understand how foreign investment is shaping cities from the ground up. This includes: how foreign investment impacts people in the local neighbourhoods where these properties are located; how developers change the dwellings they build to suit foreign investors; how changing educational institutions are shaping foreign student investment; and the experience of first homebuyers who are looking for a home in the same property markets.

Author: Dallas Rogers, Urban Studies Researcher: Institute for Culture and Society & Urban Research Program, Western Sydney University

Foreigners can buy failed off-the-plan

From AAP.

The government is bringing in changes to foreign investment rules to protect developers who are left in the lurch when a settlement falls through.

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The changes will allow foreign buyers to purchase an off-the-plan dwelling when another foreign buyer has failed to reach settlement, meaning developers won’t be left out of pocket.

It comes amid reports of a growing number of Chinese buyers failing to settle in off-the-plan property sales.

Overseas investors are allowed to purchase new Australian dwellings in a bid to encourage developers to build more houses and apartments.

Australian Property Just One of Many Markets Of Interest To Foreign Investors

Globalisation has opened up property markets around the world, with cashed up investors from China in the market snapping up overseas homes at an accelerating pace. They’re also venturing further afield than ever before, spreading beyond the likes of Sydney and Vancouver to lower-priced markets including Houston, Thailand’s Pattaya Beach and Malaysia’s Johor Bahru; according to Bloomberg.

If they were anywhere else in Beijing, the five young women in cowboy hats and matching red, white, and blue costumes would look wildly out of place.

 

But here at the city’s biggest international property fair — a frenetic gathering of brokers, developers and other real estate professionals all jockeying for the attention of Chinese buyers — the quintet of wannabe Texans fits right in. As they promote Houston townhouses (“Yours for as little as $350,000!”), a Portugal contingent touts its Golden Visa program and the Australian delegation lures passersby with stuffed kangaroos.

Welcome to ground zero for the world’s largest cross-border residential property boom. Motivated by a weakening yuan, surging domestic housing costs and the desire to secure offshore footholds, Chinese citizens are snapping up overseas homes at an accelerating pace. They’re also venturing further afield than ever before, spreading beyond the likes of Sydney and Vancouver to lower-priced markets including Houston, Thailand’s Pattaya Beach and Malaysia’s Johor Bahru.

The buying spree has defied Chinese government efforts to restrict capital outflows and shows little sign of slowing after an estimated $15 billion of overseas real estate purchases in the first half. For cities in the cross-hairs, the challenge is to balance the economic benefits of Chinese demand against the risk that rising home prices spur a public backlash.

“The Chinese have managed to accumulate very large amounts of wealth, and the opportunities to deploy that capital in their own market are somewhat restricted,” said Richard Barkham, the London-based chief global economist at CBRE Group Inc., the world’s largest commercial property brokerage. “China has more than a billion people. Personally, I think we have just seen a trickle.”

While a dearth of government statistics makes it difficult to gain a comprehensive view of cross-border real estate investments, most industry projections point to a surge in Chinese purchases. Ping An Haofang, an online real estate platform owned by China’s second-largest insurer, says its $15 billion first-half estimate, derived from market data, nearly matches the figure for all of 2015.

Fang Holdings Ltd., the country’s most popular property website, predicts overseas buying on its system will increase 130 percent this year, while transactions through September at Shenzhen World Union Properties Consultancy Inc., China’s largest broker for new-home sales, were already 50 percent above last year’s level. The country overtook Canada as the largest source of residential purchases in America last year after an estimated $93 billion of buying from 2010 to 2015, according to a May report by the Asia Society and Rosen Consulting Group.

 It adds up to the world’s biggest-ever wave of overseas residential property investment, according to Susan Wachter, a professor at the University of Pennsylvania’s Wharton School who specializes in real estate markets. While Japan had a similar boom in the 1980s, it was mainly focused on commercial buildings, Wachter said.

Today’s Chinese buyers have a long list of reasons to flock overseas. The yuan’s slump is eroding their purchasing power, while returns on local financial assets — including stocks, bonds and wealth-management products — are shrinking as the $11 trillion economy slows.

Chinese real estate, meanwhile, has grown increasingly out of reach after a speculative boom sent domestic home prices to all-time highs. Residential property values in Shenzhen, Beijing and Shanghai all jumped more than 30 percent in the year through September, according to the National Bureau of Statistics.

“Properties in Shanghai are ridiculously expensive,” Chen Feng, 38, said as he evaluated prospects at a property fair in Shanghai in September, lured by television commercials for the event the night before. “With the amount of money it takes to buy a small apartment here, I can buy a building of apartments in many places in the world.”

That line of reasoning is nothing new, of course. Sydney, Vancouver, Hong Kong, London and a handful of other cities have long been popular destinations for Chinese buyers.

The difference now is that those traditional hotspots are starting to lose their appeal, due to soaring prices and new measures to deter an influx of overseas money. In Hong Kong, the government enacted a 30 percent tax on foreign property owners this month after Chinese demand pushed home values toward record highs.

The risk of similar measures in other cities can’t be ruled out as politicians including Donald Trump, the U.S. president-elect, tap into local discontent over rising living costs, according to CBRE Group’s Barkham.

Ocean Views

Chinese buyers have responded by branching out to cheaper cities. In the U.S., they’re increasingly searching for properties in Houston, Orlando and Seattle, which displaced San Francisco in the first quarter as the third-most viewed U.S. market on Juwai.com, a Chinese search engine for offshore real estate.

At the national level, countries in Southeast Asia have grown more popular. Juwai.com’s queries on Thailand are surging at a 72 percent annual rate, helping it surpass Britain as one of the top five most-targeted destinations worldwide earlier this year.

In Pattaya Beach, Chinese investors have snapped up 20 percent of the luxury condos on offer from Kingdom Property Co. over the past year. The properties offer Gulf of Thailand views for as little as $120,000, or less than a quarter of what buyers would pay for a typical apartment in central Shanghai, according to Han Bing, a 30-year-old anchor in Chinese television shows who doubles as a sales agent for the Bangkok-based developer.

“It’s a cool bargain for a retirement plan,” Han said.

Capital Controls

In the Malaysian state of Johor, across the Northern border of Singapore, major Chinese builders including Country Garden Holdings Co., Greenland Holdings Corp. and Guangzhou R&F Properties Co. are all developing new projects. Country Garden agents handed out fliers for the firm’s $37 billion Forest City development at the Beijing property fair in September, advertising permanent property rights, zero inheritance taxes, long-term residence visas and high-quality hospitals.

One challenge for Chinese investors is getting money out of a country that caps individuals’ foreign-currency purchases at $50,000 a year. While that limit hasn’t always been strictly enforced, the yuan’s slump is prompting policy makers to clamp down. This year, they’ve banned the use of friends’ currency quotas, curbed on the cross-border activities of underground banks and asked lenders to reduce foreign-exchange sales.Still, alternative routes abound. Many business owners finance their homes through offshore trading companies, while some Chinese developers allow clients to pay for overseas units in yuan. Foreign-currency mortgages also play a role, helping to fund more than 80 percent of China’s international property purchases, according to an estimate by Fang Holdings based on user searches and surveys.

Planning Ahead

“Where there’s a will, there’s a way,” said David Ley, a professor at the University of British Columbia who wrote a book on the flood of wealthy migrants from east Asia in the 1980s and 1990s.

This year’s purchases could be just be the tip of the iceberg. Chinese holdings of global real estate, including commercial properties, will probably swell to $220 billion by 2020 from $80 billion in 2015, according to Juwai.com.

As the first generation born after China’s opening in the late 1970s approaches middle age, many of them want an overseas base for family members to travel, study and work. Chinese parents with children at foreign schools have been a major source of demand, accounting for an estimated 45 percent of cross-border buying, according to Fang Holdings.

Zha Liangliang, a 31-year-old owner of commercial wheat farms in China’s eastern Jiangsu province, said he purchased a $587,000 apartment in Sydney in August and plans to add five more before sending his children to high school in Australia. He’s flying to the country this month to view homes and farmland, hoping to buy before the yuan weakens any further.

For some investors, it’s never too early to pull the trigger. Richard Baumert, a partner at Millennium Partners Boston, tells the story of a 33-year-old Chinese man who purchased a luxury home for his future children in August, convinced they’re destined to attend one of the city’s prestigious universities.

The buyer shelled out $2.4 million for the property, Baumert said, unfazed by the fact that he’s single and it could be two decades before he has kids old enough for college.

The Rise Of The “Non-Resident Reference Rate”

From Australian Broker.

broker-concept-pic

Westpac will soon increase interest rates for foreign mortgage customers, reports the Australian Financial Review.

In its column, Street Talk, the paper says that the major bank will introduce a new loan category, Non-Resident Reference Rate, next month. Customers falling under this category will be required to pay a 0.5% higher standard variable rate.

These changes will affect offshore-based customers who currently have loans with the bank and not Australian citizens or residents.

The decision is the latest in a long crackdown by the major banks on foreign lending spurred on due to the difficulty in securitising these types of loans.

Talking with the Australian Financial Review, a Westpac spokesperson said that the higher rates took into account the bank’s “risk settings, the economic landscape, and expected changes in capital requirements for that segment of the mortgage market”.

As of 26 April, Westpac announced it would no longer loan money to foreign home buyers seeking to purchase residential property – meaning that the bank has not settled any new mortgages from offshore-based clients since then.

A spokesperson confirmed with Australian Broker that offshore loans were a small part of Westpac’s portfolio as well.

Other major banks such as NAB and ANZ have also introduced similar policies halting new loans to foreign buyers.

Westpac has also dropped its loan-to-valuation ratios (LVRs) from 80% to 70% for local applications that include foreign income.

Chinese ‘upgraders’ adding new twist to real estate boom

As Chinese buyers gain residency, they also want to move into existing homes partly so they don’t have to compete with foreign investors buying overpriced apartments. From News.com.au.

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Shanghai-born accountant Vincent Liu, 33, moved to Sydney around 10 years ago to complete his Masters degree. After renting in three different suburbs, he finally bought an apartment in Macquarie Park in 2012 for $570,000.

But with a young daughter and family, he’s already to keen to move out.

“A lot of my friends and schoolmates are in a similar situation,” he said. “We bought apartments or units around 2012 or 2013, now most of them have kids or are planning for the next stage of their life.”

Mr Liu said another concern for this group was the potential oversupply in apartments, making houses or townhouses with land attached a more attractive long-term investment.

“[But] I don’t think they’re going to sell just because of price fluctuation in the short term, unless something major happens,” he said. “For Chinese people, growth is not their major concern, it’s about putting money in a safe place.”

And as Chinese buyers gain residency, they also want to move into existing homes partly so they don’t have to compete with foreign investors buying overpriced apartments.

“For new migrants I don’t think apartments are going to be a good option now, especially if they don’t want to compete with foreign investors,” he said. “It’s better to save a little bit more [and wait].”

Mr Liu argues Australians concerned about rising house prices due to foreign investment should blame the government — not the Chinese.

“Australia is gathering investment from all over the world, your economy got a boost based on that,” he said. “Yes, local residents in Sydney or Melbourne might suffer a little bit but in the end it’s the all the government’s call.

“You want the investment, you introduce the money, now your residents are suffering because of your decision. It’s not one single factor that caused the situation.”

According to Mark Lauzon from Sotheby’s International Realty, the Chinese “came for the education and ended up staying for the lifestyle”.

“A lot of these couples arrived as single students, decided to start a career here after graduation and ended up marrying either another student from overseas or a local,” he said.

Mr Lauzon said he was currently selling a penthouse apartment in Waterloo owned by a couple from China. “Their penthouse is big enough for a family, but the vendors would like to move to a house or terrace to raise kids,” he said.

“In part, they are worried about having children on a high-floor apartment with balconies.

“They are hoping to stay in same area. The challenge for young families in Waterloo, Zetland and much of South Sydney is that there is a shortage of stock of single-family homes, and there aren’t many school catchments. They also look at Kensington and Surry Hills because there are not enough primary schools in this part of Sydney.

“People in South Sydney have really embraced apartment living. In terms of family-friendly, they prefer to look at terraces.

“Many of these vendors are very loyal to the area. They like this area because of its good infrastructure, transit, restaurants and shopping.”

James Pratt, director of auctions for Raine & Horne and J Pratt Realty, said a three-bedroom house in Zetland which recently broke the suburb price record went to upgraders.

“The buyers were Chinese, looking for a good place to raise a family,” he said.

“We are seeing Chinese upgraders at auctions in numbers I don’t recall seeing before. More and more, I am auctioning their units for them, and then see them bidding for the house they want to move to.”

Mr Pratt said so far this year he had sold around 26 entry-level apartments in South Sydney for Chinese-origin owners who were moving to a terrace or house. “Most of these buyers by now have Australian permanent residency,” he said.

Jackie Wang from Raine & Horne Ashfield said with the busiest time of the year, the spring selling season now here, she was expecting many more transactions over the next three months.

“Different from overseas Chinese buyers, local Chinese buyers are not bound by law to purchase brand new property, and they are more into existing homes,” she said.

“First home buyers are usually searching for old unit in a good location which can be owner occupied for a few years, then easy to rent out as investment once they are ready to upgrade to a house.

“Upgraders are more attracted to houses with nice features and space for the growing family. They live in a unit or apartment and are planning to upgrade to large semis or houses in the nearby area.

“From the recent sales around Ashfield area, I can see a lot of local Chinese upgrade buyers still have strong interest in Torrens title properties, especially the local upgraders.”

In just the past five years, Chinese investment has grown from 10 per cent to 25 per cent of all foreign real estate investment in Australia.

According to Gavin Norris, Australian head of Chinese real estate portal Juwai.com, there were potentially several thousand Chinese-origin households in this situation, “ready to move up the property ladder in the traditional Australian way”.

“Chinese buying in Sydney only really began in earnest in about 2009,” Mr Norris said.

“A home to live in while studying in Australia is the biggest driver of Chinese property buying in the big capital cities like Sydney. Now that the significant Chinese investment trend has passed the half-decade mark, these buyers are starting to age out of their first purchase. Many of them have married and are starting families.

“One out of every three people living in some Sydney suburbs, such as Haymarket and Ultimo, is a student from overseas. And 39 per cent of Sydney residents overall were actually born in another country — so this is potential a very large group of new buyers looking to purchase.

“The fact that so many of these buyers intend to hold onto their first purchase as an investment, rather than sell it to fund a larger new home, shows their frugality and dedication to real estate as an asset class.”

Fintech Offers New Escape Route For Off The Plan Investors

From Fintech Business.

A new off-the-plan property sale platform has been launched to cater for foreign investors who are looking to on-sell their investment via nomination before the settlement date.

Investment--PIC

Aofun.com.au has launched an online platform that will allow property buyers, who have made down payments on off-the-plan properties, the opportunity to on-sell their investment via nomination before settlement.

The platform is primarily targeted at foreign investors who have been ‘caught out’ by the major Australian banks’ decision to tighten their lending to foreign investors.

Aofun founder and chief executive Jason Zhu said many potential sellers who bought an off-the-plan property in the past few years now have “little or no” chance of securing finance.

He said some of these sellers may be willing to forgo the full 10 per cent deposit.

“There is a real opportunity for first home buyers who may not have sufficient savings for their first home to register on the website and acquire their first home with the deposit paid,” Mr Zhu said.

He added that the Aofun platform allows the original buyers to list their property, and hopeful buyers can make an offer.

“Buyers and sellers can then negotiate the final sale price on the property via the online portal. The sale will then proceed through all the normal legal processes.”

Many original buyers may be willing to sell below the original contract amount to avoid a potential lawsuit from the property developer or to avoid receiving a bad credit rating – factors that “may have negative implications for any future immigration application to Australia or investment in Australia,” according to Mr Zhu.

“The reality facing the market is that many of the overseas buyers of these properties, for various reasons, are not going to able to complete their purchases, leading to an oversupply that will inevitably place a sizable burden on the property and construction industries.”

The ‘Huge Uncertainty’ in Some Australian Apartment Markets

From Business Insider.

Australia is building an extraordinary number of high rise apartments right now. Everywhere you look, there seems to be a new development under construction, especially in Australia’s southeastern capitals.

And, going off recent building approvals data, it seems that there are a whole lot more coming.

Like a number of other commentators, Bill Evans, chief economist at Westpac, is uneasy about Australia’s high rise construction boom, stating in a research note released today that “huge uncertainty prevails in this market”.

The source of this uncertainty, says Evans, is the heavy involvement of Chinese buyers in the market, something that has helped propel the building boom in recent years along with the increased prevalence of housing investors.

“The number of high rise apartments currently under construction in March this year (ABS latest) has surged to 110,000 – including 44,000 in New South Wales; 34,000 in Victoria; and 23,000 in Queensland,” says Evans.

“However, a significant proportion of the buyers are offshore based, so called FIRB buyers,” he adds.

According to a recent survey conducted by ANZ in consultation with the Australian Property Council, foreign investors accounted for 23.9% of all property sales in Australia during the June quarter of 2016. The proportion of sales in Victoria and New South Wales were the highest in the country, accounting for 30.8% and 25.4% of all sales over the same period.

With so many apartments being sold to foreigners, many of them to Chinese, it is clear that much of the residential building boom, and beyond that the outlook for prices, is determinant on the continued involvement of foreign investors.

According to Evans, this creates heightened risks for the sector should the buying start to dry up.

He suggests that recent moves from Chinese policymakers to stymie capital outflows from the country not only heighten risks for apartment prices and settlement on newly constructed apartments, but are also a crucial cog in Australia’s economic transition, the booming residential construction sector.

“At some point, the Chinese authorities, who appear to have stabilised last year’s spectacular near USD 1 trillion loss in foreign reserves, may decide to slow this leakage,” says Evans.

“Certainly we have seen marked evidence of a tightening of capital controls, particularly for the non-corporate sector. That tightening of capital controls might also impact the construction boom.”

Adding to the uncertainty, Evans says that Australian banks have stopped funding FIRB buyers, suggesting that this presents “risks to local developers who may have sold more than 50% of their stock to these buyers”.

“It is generally accepted that apartment buyers in the Melbourne CBD have incurred some capital losses, while Sydney purchasers are seeing their profits squeezed,” he says. “These liquidity and capital loss prospects may discourage foreign buyers, with the result of sharply slowing the apartment construction cycle.”

Evans, like others, is unsure how it will all play out, noting that possible outcomes range “from ongoing spectacular momentum to a sudden liquidity driven slowdown”.

In the case of the latter, he says “one part of the recent boost to Australia’s growth story might fade quickly”.

The sentiment expressed by Evans is similar to that communicated by a growing number of analysts.

In a research note released in early September, Ivan Colhoun, chief markets economist at the National Australia Bank, suggested that the presence of a large numbers of foreign investors in these markets complicates not only the outlook for prices but also settlement risks.

“Recent trends and reports suggest there has been a modest increase in delays in settlement rather than outright non-settlement. And it is typically foreign buyers that are now finding it somewhat harder to access finance and/or expatriate finance (the latter largely from China),” he wrote.

Cameron Kusher, research analyst at CoreLogic, suggested in May that tighter restrictions on overseas buyers from Australian banks was a factor that could amplify settlement risks for newly built apartments in the years ahead.

“Mortgage lenders have recently tightened their lending criteria, subsequently some people who have committed to off-the-plan units may not be able to borrow as much as they could at the time of signing the contract,” said Kusher.

As a result, Kusher noted that there was a clear risk that some properties may be be worth less than the price they were purchased for, heightening settlement risks.

“Many of the units are coming up for settlement in similar locations and will compete with existing unit stock,” he said.

“With so much stock coming online at once there is an increasing concern as to whether settlement valuations will actually meet the contract price of these units.”

Government Trumpets Foreign Buyer Clampdown

In a statement today, the Treasurer highlighted further forced sales and fines imposed on foreign investors who have purchased a residential property. The body count is 46, with 400 still under investigation, so the number of actions, and amounts involved are very small, when compared to the whole market.

Investment--PIC

Treasurer the Hon. Scott Morrison has ordered the divestment of a further 16 Australian residential properties that have been held by foreign nationals in breach of the foreign investment framework, taking the total purchase price of Australian residential real estate divested to over $92 million.

“The divestments of these 16 properties, which have a combined purchase price of over $14 million, are further evidence of the Turnbull Government’s commitment to enforcing our rules so that foreign nationals illegally holding Australian property are identified and their illegal holdings relinquished,” Mr Morrison said.

“Foreign investment provides significant benefits for Australia but we must also ensure that such investment benefits all Australians, is in-line with our rules and is not contrary to our national interest.

“The 16 properties were purchased in Victoria, New South Wales, Queensland and Western Australia with prices ranging from approximately $200,000 to $2 million. The individuals involved come from a range of countries including the United Kingdom, Malaysia, China and Canada.

“The foreign investors either purchased established residential property without Foreign Investment Review Board approval, or had approval but their circumstances changed meaning they were breaking the rules.

“Since taking office in 2013, the Coalition Government has forced foreign nationals to divest a total of 46 properties. Under the previous Labor government, no foreign nationals were forced to divest illegally held Australian property.

“These divestments are a reminder that the Coalition Government’s increased compliance measures, which include transferring responsibility for residential real estate enforcement to the Australian Taxation Office (ATO), are working to ensure our foreign investment rules are being enforced.

“Since the Government’s transfer of responsibility to the ATO for compliance in May 2015, over 2,200 matters have been referred for investigation. Through information provided by the public, together with the ATO’s own enquiries, approximately 400 cases remain under active investigation.

“Since a new penalty regime was introduced from 1 December last year, 179 penalty notices have been issued, totaling over $900,000. Penalty notices have been issued to people who have failed to obtain FIRB approval before buying property as well as for breaching a condition of previously approved applications.

“Illegal real estate purchases by foreign citizens attract criminal penalties of up to $135,000 or three years’ imprisonment, or both for individuals; and up to $675,000 for companies. The new rules also allow capital gains made on illegal investments to be forfeited.

“In addition to divestments, a number of people came forward during the reduced penalty period who were not in breach and some who voluntarily sold their properties while the ATO was examining their case. There are at least 25 examples of foreign investors self-divesting in this way showing a change in behaviour towards more compliance with the rules and a strengthening of the program overall.

“While Australia welcomes foreign investment, foreign investors must comply with our laws,” Mr Morrison said.

The Business Does Foreign Property Investors

Interesting segment from the ABC looking at foreign investors, with a focus on Chinese investors. They highlight a number of factors which suggests momentum from this sector may slow.

Loan availability is tightening, and as supply of units in Melbourne and Sydney rise, prices may slide, meaning that some already to committed to purchase off the plan apartments may not be able to complete.

One agent says only 20% of purchasers physically visit the property, and as banks have introduced tough new rules, and the states, surcharges; the market may slow significantly.

That said, some private lenders are filling the mortgage gap though at higher rates and demand still remains.