Sydneysiders blame foreign investors for high housing prices

From The Conversation.

Sydneysiders are concerned that foreign investors, and particularly Chinese real estate investors, are pushing up housing prices, according to survey findings published this month. A majority believed foreign investors should not be allowed to buy residential real estate in Sydney.

The federal budget was the government’s latest attempt at navigating a policy solution that supports its pro-foreign investment position while responding to public concern about housing affordability in Australian cities.

China’s government is also searching for a policy solution to restrict the large amount of capital that’s flowing out of the country. But the Chinese crackdown “doesn’t appear to be working”.

We surveyed almost 900 Sydneysiders to investigate their views on foreign real estate investment. The effectiveness of government regulations on foreign investment and investors was a major concern for respondents.

Views on government regulations

The survey obtained the views of people aged over 18 living in the Greater Sydney region. They were asked about housing affordability, foreign investment, the drivers of Sydney housing prices, and perceptions of Chinese investors specifically.

Support for the government’s regulation of foreign investment in housing was weak. Only 17% of respondents thought it was effective.

Almost 56% of participants believed foreign investors should not be allowed to buy residential real estate in Sydney. Only 18% believed this should be permitted.

More than 63% of participants disagreed that the “government should encourage more foreign investment in greater Sydney’s housing market”. Only 12% of participants agreed with this.

These views stand in stark contrast to the government’s geopolitical support for foreign investment in Australia.

Views on foreign investors

There is little fine-grained data about the impacts of foreign capital and investors on specific neighbourhoods and developments in Australian cities. Therefore, we did not set out to compare public attitudes against the limited empirical evidence on the effects of foreign real estate investment in Sydney.

What’s significant about the survey results is that Sydneysiders have strong views on foreign investment, despite the absence of reliable evidence. Participants’ concerns about foreign investors and investment were consistent with their concerns about the government’s foreign investment rules.

Around 63% of Sydneysiders identified the Chinese as the heavyweights of foreign investment. This is likely to be accurate, given the concentration of Chinese investment in Sydney and Melbourne.

When presented with the statement “I welcome Chinese foreign investors buying properties in my suburb”, more than 48% of participants disagreed.

Other studies, however, have shown the potential for public confusion between domestic Australian-Chinese and international Chinese buyers.

Views on the drivers of housing prices

Respondents were asked to choose up to three drivers of house prices based on their understanding of Sydney’s housing market. By far the most commonly nominated driver of house prices (64% of respondents) was foreign investors buying housing.

Roughly one in three survey participants saw low interest rates (37% of respondents) and domestic home owners (32%) and investors (32%) as the drivers of higher housing prices. Local housing analysts generally agree with this.

But more than three in four participants (78%) agreed with the statement:

Foreign investment is driving up housing prices in greater Sydney.

When framed inversely, as “Foreign investment has no impact or very small impact on greater Sydney’s housing market”, more than two-thirds of participants (68%) disagreed with the statement.

Only 6% of our participants disagreed that foreign investment was increasing real estate prices. Around 11% agreed that foreign investment had no or minimal impact.

Views on housing supply and affordability

We expected people to report that foreign people and capital are driving up housing prices and making it more difficult for Australians to compete in the housing market. But we were surprised by the findings about Sydneysiders’ views on foreign capital and housing supply.

A strong message from the real estate and property development industries is that foreign investment increases housing supply, which in turn puts downward pressure on prices.

Politicians and lobby groups argue this will help improve housing affordability in major Australian cities. But many housing analysts argue that this supply solution does not stack up for purchases made by either foreign or domestic investors.
It seems that Sydneysiders don’t accept the real estate industry message about foreign investors increasing housing supply, and therefore helping to ease housing affordability pressures.

When asked if “Foreign investment can help increase housing supply in greater Sydney”, 48% of participants disagreed with the statement. Another 25% “neither disagreed or agreed”.

An unresolved policy dilemma

The government’s dilemma is how to manage foreign investment alongside an increasing housing affordability problem in major Australian cities.

This month’s federal budget included a crackdown on foreign investors, but the government still supports foreign real estate investment.

Our survey results support other studies that suggest this pro-foreign investment stance must be accompanied by strategies to protect intercultural community relations. This must happen alongside efforts to improve housing affordability.

Authors: Dallas Rogers, Senior Lecturer, Faculty of Architecture, Design and Planning, University of Sydney; Alexandra Wong, Engaged Research Fellow, Institute for Culture and Society, Western Sydney University; Jacqueline Nelson, Chancellor’s Postdoctoral Research Fellow, University of Technology Sydney

Westpac overhauls lending conditions

From Australian Broker.

Major bank Westpac and its subsidiaries BankSA, Bank of Melbourne and St George have announced a wide range of changes to home loan products across the board.

Westpac has increased the rates on its fixed rate investment property, SMSF and non-resident fixed investment property loans with interest-only repayments by 20 basis points. These changes came into effect on Monday (22 May).

There will be no changes to Westpac’s policy of no new lending to non-residents, however, with the increased rates only available to non-residents seeking to switch their existing lending.

The major has also updated its customer identification and verification process, meaning brokers will now also have to ask for tax residency information.

Under the Common Reporting Standard (CRS), banks such as Westpac are obligated to collect and maintain information about the foreign tax residency of their customers. This means that, effective from Monday (22 May), new mortgage customers will need to confirm if they are a tax resident of a foreign country.

The collection of this data is mandatory when finalising a customer’s loan application with a branch. If the individual answers yes, the countries where they are a tax resident plus their Tax Identification Number (TIN) will need to be collected.

“Please be aware of this new requirement as you are having discussions with your customers, to prepare them for what information they need to provide to branch staff,” Westpac wrote in a broker note.

“We regularly review our rates and the changes to fixed rates reflect prudential regulatory requirements and the economic environment,” a Westpac spokesperson told Australian Broker.

Westpac’s subsidiaries

At BankSA, Bank of Melbourne and St George Bank, a number of changes have been made to interest rates across a wide variety of owner occupier and investment products, effective Monday (22 May).

For standard fixed rate principal & interest mortgages, the three year fixed rate for owner occupiers has dropped by 21 basis points while the three year fixed rate for residential investment dropped by 30 basis points.

The interest rate for these lenders’ residential investment standard fixed rate interest only loans increased by 20 basis points for terms between one and five years.

A similar increase of 20 basis points has also been made across all portfolio fixed rate loans (of one to five year terms).

Rates for principal and interest low doc loans have only changed for those with three year terms. For owner occupiers, rates dropped by 21 basis points while for residential investment they dropped by 30 basis points.

The final rate change is an increase of 20 basis points to all residential investment low doc fixed rate interest only loans and fixed rate super fund interest only home loans regardless of the term.

Westpac’s subsidiaries have also extended the current $1,500 Refinance Cashback offer for owner occupiers and investors which was previously due to expire on 31 May. Those eligible will need to refinance from outside Westpac or its subsidiaries. Owner occupiers are restricted to switching to a principal and interest loan.

Finally, the banks have banned borrowers from switching from principal and interest loans to interest only within the first 12 months of loan drawdown. If the client requires this, a full re-origination will be required with some limited exemptions.


Citi Australia halts new foreign interest only lending

From Australian Broker.

Citi Australia has updated its new home loan policies including a freeze on new interest only lending to foreign buyers.

Effective from 13 April for all new Citibank applications, the interest-only repayment option on both standard variable loans and the Mortgage Power line of credit is now not available for:

  • Loans solely with owner occupied security
  • All non-resident loans
  • Loans reliant on foreign income
  • Loans which require FIRB approval

“This means, interest only repayments will only be allowed for resident loans secured by investment property, unexpired pipeline deals remain unaffected,” the bank said in a note released to brokers.

For loans with mixed securities (cross-collaterised owner occupier and investment properties), interest only repayments and Mortgage Power are only available on the portion of the loan that exceeds the value of the owner occupied security.

Citibank has also announced that interest only repayments will not be available for mortgages with an LVR of greater than 80%.

Finally, the bank’s offset mortgage product will no longer be offered to all new Citigold non-resident and foreign income applications.

There’s finally hard data on the huge role of foreign buyers in Australian property

From Business Insider.

We now know how many houses foreign investors are buying in New South Wales and Victoria, the hotbeds of Australia’s housing affordability debate.

According to new research based on data obtained under a Freedom of Information request by Hasan Tevfik and Peter Liu, research analysts at Credit Suisse, foreigners are buying property at an annualised rate of $8 billion per annum, equating to 25% of new supply in New South Wales and 16% in Victoria in the past 12 months.

“We have been able to gather new data from the state revenue offices of New South Wales and Victoria that reveal the size, source and changes in foreign demand for Aussie housing,” the pair wrote in a research note on Thursday.

“The data is new and is available because state governments now collect taxes from foreign buyers.”

The bombshell figures suggest that, along with local investors, the level of foreign investor activity in the housing markets has been a significant driver of the price growth of recent years, and the overwhelming majority — a staggering 80% in NSW — is coming from China.

In a note to clients, Tevfik and Liu write:

Now there is credible, official data on the amount of foreign demand for Aussie housing. We made a Freedom of Information Act request for this data and you can imagine our excitement (we are nerds and love new data) when the state governments of NSW and Victoria complied. Here is what the data reveals.

1. Foreign demand for housing in NSW is currently running at an annualised rate of $4.9bn and is the equivalent of 25% of new supply. We think this is extraordinary given that current supply is nearing peak cycle. In Victoria foreign buyers are hoovering up 16% of new supply.

2. When we talk about foreign buyers we are really talking about Chinese buyers. The Chinese have accounted for almost 80% of foreign demand in NSW. The second biggest group, the Indonesians, account for just 1.7% of foreign demand.

3. It is clear foreigners have been able to settle on their Aussie properties more recently despite the numerous impediments of capital controls and the lack of lending by Aussie banks. There is little evidence so far to suggest the flows have stopped.

“The taxes collected imply foreigners are currently purchasing an annualised $4.9 billion of New South Wales housing and $3.1 billion in Victoria,” say Tevfik and Liu.

According to recent data from CoreLogic, the median dwelling price in Sydney increased by 18.9% in the 12 months to mid-March, and by 14.7% in Melbourne. From January 2009, prices in Sydney have surged by 106%. Melbourne price growth has been similarly strong, increasing by 89%.

The rate of price growth has concerned policymakers, with the federal government examining a range of policy responses in its forthcoming budget to address affordability, and the central bank flagging increasing concerns about financial stability.

“In New South Wales there were 1,503 properties settled involving foreign buyers from October 2016 to January 2017 and they totaled $1.63 billion in value.

“Chinese buyers settled on 1,211 or 80% of them and accounted for 77% of the total purchase value.”

Source: Credit Suisse


Tevfik and Liu say that the Chinese figures include buyers from not only mainland China but also Hong Kong, Macau and Taiwan.

There is also little indication that they are having trouble in meeting their settlement obligations, yet.

“In New South Wales there were $225 million of foreign settlements in October 2016 and this rose to more than $450 million in both November and December. In Victoria the value of December settlements was 50% higher than in November,” they say.

“So despite the capital controls put in place in China, and the local banks refusing to lend to purchasers from abroad, foreign buyers were still able to find the financing to complete their transactions.”

In late 2016, China’s central bank begun vetting capital transfers abroad worth $US5 million or more. Previously, only transfers worth $US50 million were required to be reported to authorities.

Those restrictions were tightened further at the beginning of this year with regulators stipulating that people could not purchase foreign exchange for overseas investment, including for buying houses.

With the tax data on foreign purchases now several months old, whether this is impacting the ability of Chinese investors to settle is, as yet, unknown.

According to a report in The Australian earlier this month, many Chinese buyers were struggling to settle upon apartments that they had previously purchased in Melbourne.

Push to increase stamp duty for foreign buyers

From The New Daily.

The New South Wales government is considering increasing stamp duty paid by foreign investors to help first-home buyers get on the property ladder.

The news comes as figures reveal more than one in 10 residential properties sold in NSW are being snapped up by foreigners, with a third of them bought by Chinese nationals.

Data from the Office of State Revenue shows that in the three months from July to September 2016, foreign nationals accounted for 11 per cent — or 2995 — of residential property purchases in NSW compared with 7.51 per cent by first home buyers, according to NSW Labor.

Opposition leader Luke Foley is also pushing for the surcharge to be lifted from 4 per cent to 7 per cent for foreign investors on residential homes — to dampen the pressure they exert on housing prices.

“Evidence suggests a surcharge on foreign investors will take some pressure off house prices and go a way to levelling the playing field for first home buyers,” he said on Tuesday.

NSW Treasurer Dominic Perrottet was aware of the problem and would lift the surcharge in the June budget, according to News Corp.

Premier Gladys Berejiklian concedes more needs to be done to improve housing affordability in the state. 

Doubts over what will help people into housing market

Deputy director of the Australia-China Relations Institute at the University of Technology, Professor James Laurenceson, has also questioned whether the move would improve affordability for Australians trying to get into the housing market.

“The housing prices particularly in Sydney are still going up and that gets at this point — even if the proportion of foreign buyers falls it doesn’t mean that house prices are going to fall,” he said.

He said it was simply not true that foreign buyers, particularly those from China, were squeezing Australians out of the market.

“Foreign Chinese buyers only account [for] 3.6 per cent of demand in New South Wales — a lot of that demand is for new apartments, new houses, not existing houses,” he said.

Professor Laurenceson said 96.4 per cent of buyers were local, so it “was a bit rough to say ‘Chinese buyers are squeezing out local buyers’.”

“Something that the Reserve Bank of Australia has long talked about is the fact that the types of properties foreign investors are buying are not the types of properties first home buyers are buying,” he said.

The Berejiklian Government has made improving housing affordability a priority, and has identified increasing housing supply as a key means to achieve it.

Professor Laurenceson said a Senate Inquiry last year found that foreign investors increased housing supply in Australia.

“It’s basic economics, if you expand supply it’s going to restrain housing price growth, it’s certainly not going to put upward pressure on it.

“There’s lots of reasons why housing prices are going up —but laying the blame at the feet of Chinese buyers when they only account for 3.6 per cent of total housing demand is clearly a misleading narrative.”

– with AAP and ABC

Other lenders fill the gap as big four clamp down on foreign borrowers

From The Real Estate Conversation.

Though the big four banks have clamped down on lending to foreign nationals, other lenders have moved to fill the gap, and the share of properties bought by foreign nationals in the Australian market ticked higher at the end of 2016

Other lenders have moved to fill the gap, including developers themselves, but lending hurdles are higher across the board. Foreign nationals looking to obtain finance in Australia are often left disappointed in the current environment.

While the big four are not writing new loans for non-residents, some do still consider loans for temporary visa holders.

Lending criteria for foreign nationals varies across the big four.

Westpac is not writing new loans for non-residents.

The Commonwealth Bank doesn’t provide loans to non-residents. CBA has a maximum LVR of 70 per cent for selected temporary visa holders earning Australian income.

ANZ no longer lends to foreign nationals. Applicants must be permanent residents of Australia, NZ citizens, or 457 visa holders. Applicants are allowed to have a maximum of 30 per cent foreign income, with specific documentation required to verify it.

For National Australia Bank, a maximum LVR of 60 per cent applies for temporary visa holders living in Australia, and 70 per cent for Australia and New Zealand citizens and permanent residents living overseas. All foreign income is ‘shaded’ by 40 per cent when assessing serviceability.

HSBC and Citigroup are said to be filling the gap when finance isn’t available from the big four, according to some reports, but both banks did not reply to requests for information.

John Kolenda, Managing Director of 1300HomeLoan, told SCHWARTZWILLIAMS it is more challenging for foreigners to obtain housing finance in Australia than in the past, but it’s not impossible.

He said, “Some, mainly second-tier lenders, are still lending to foreign nationals. However, these applicants must meet strict credit criteria and maximum LVRs have been significantly reduced over the last 18 months, making obtaining a non-resident loan quite challenging.”

Kolenda said demand from foreign nationals for Aussie loans is as “strong as ever”, but doesn’t always get the borrower over the line.

“The problem is some applicants are simply unable to meet the lender’s credit criteria leaving many foreign nationals without the ability to obtain funds in Australia to purchase a property,” he said.

Though tighter lending restrictions at the big four banks has, to a certain degree, simply shifted demand to other lenders, Kolenda says those “other lenders” are also constrained in their lending.

“These lenders in many cases have increased interest rates, tightened credit criteria and reduced maximum LVRs on non-resident loans,” he said, adding, “many non-resident borrowers may find difficulty obtaining a loan from all lenders at the moment.”

According to NAB’s Residential Property Survey, foreign buyers increased their share of both new and established property markets in the final quarter of 2016, the first increase since late 2015.

The share of new property sales made by foreign nationals increased to 10.9 per cent during the December 2016 quarter. The rise follows four quarters of declining rates – no doubt an impact of the tighter lending rules. The recovery at the end of the year could indicate foreign nationals are finding finance elsewhere as alternatives to the major banks spring up.

In new property markets, foreign buyers were noticeably more prevalent in Victoria, where their market share of sales rose to 19.3 per cent, up from 15.0 per cent in the previous quarter.

The same trend was observed in the share of foreign buyers purchasing existing dwellings, which rose to 7.6 per cent in the fourth quarter of 2016, up from 6.4 per cent the previous quarter, and the highest result since the final quarter of 2015.

Foreign investors forced to sell $100m of property

From Australian Broker.

The government has forced a number of foreign nationals to sell 15 Australian residential properties after breaching the foreign investment framework.


“We’ve taken further action on ensuring that Australian home buyers get a fair go when it comes to buying whether it’s their first home or subsequent home by ensuring that our rules on foreign investment are enforced,” said Treasurer Scott Morrison in a doorstop interview yesterday (6 February).

In 2015, the government announced an amnesty for foreign investors who had purchased property illegally. From 2 May to 30 November, investors could notify the government and, although they would be forced to sell, would suffer no penalties as a result.

Since the end of the amnesty, the total number of forced sales has reached 61 with a combined total of $107 million. The 15 most recent properties were all located in Victoria and Queensland and have a combined purchase price of over $14 million, according to the Treasurer’s office.

“Over $100 million worth of residential real estate assets, owned and illegally acquired by foreigners, have been forced to divest. Another 15 properties today. And it’s not just at the high end of the market, it’s the low end of the market as well where many Australians are trying to get into the market,” Morrison said.

The foreign nationals – who come from countries such as China, India, Indonesia, Malaysia, Iran, the United Kingdom and Germany – purchased their properties without approval from the Foreign Investment Review Board (FIRB).

In some cases, foreign nationals held multiple investment properties in breach of regulations. These breaches were uncovered through data matching programs as well as information gathered from the public.

The Australian Taxation Office (ATO) has detected over 570 foreign nationals who have breached the rules, resulting in forced sales, self-disposals, amendments to previously approved FIRB applications and retrospective approvals with strict conditions.

Breaches result in civil penalties or criminal prosecution with the 388 penalty notices given to foreign nationals attracting penalties of more than $2 million.

Criminal penalties were increased on 1 December 2015 to $135,000 or three years imprisonment for individuals and $675,000 for companies. Additional civil penalties of up to 10% of the market value of the property can apply to foreign owners who purchased their property without FIRB approval after this date.

For those who purchased their property before 1 December 2015 without FIRB approval, criminal penalties include an $85,000 fine or two years imprisonment for individuals or $425,000 for corporate entities. Civil penalties of up to 25% of the market value of the property can also apply.

This new regime allows for a graduated approach to penalising foreign investors – ranging from issuing infringement penalties through to civil and criminal penalties. This lets the ATO match the penalty to the behaviours found.

“We’re trying to ensure, I think with some success, that our foreign investment rules are enforced on every occasion and for those who think they can creep in, and snatch away some property from the hands of Australian home buyers, well, we have got news for you, you will be forced to sell it and to do that forthwith,” Morrison said.


China injects $1 billion of “suspicious” funds into Australian property

From Australian Broker.

The Australian Transaction Reports and Analysis Centre (AUSTRAC) has reported that in 2015-16, around $1 billion in funds related to property and real estate were transferred between China and Australia.

Typically, AUSTRAC is notified of these matters via suspicious matter reports (SMRs) which are submitted by banks, money remitters and other financial institutions.

Suspicion may be warranted – and a report sent to AUSTRAC – in a number of circumstances including if a bank or institution thinks a person is not who they claim to be, the information given relates to evading tax law or aiding criminal activity, or there is a chance of money laundering or terrorist funding.

John Moss, AUSTRAC’s national manager of intelligence, told Australian Broker that these SMRs indicate a total of $3.36 billion of funds was sent between China and Australia in the stated time period.

“AUSTRAC data shows that the overall total amount of fund flows between Australia and China during 2015-16 was $76.7 billion,” Moss said.

The agency was constantly vigilant to identify increases in the number of suspicious transactions from a number of countries, including China, he added.

“We’re confident that the agency’s approach with our Chinese counterparts through a recently signed Memorandum of Understanding, as well as close collaboration with Australian law enforcement and other partner agencies – such as the ATO, ACIC and FIRB – is providing an effective response to protect the Australian community from such financial crime.”

Foreign Property Buyers On The Rise

According to the latest NAB Quarterly Australian Residential Property Survey, Q4 2016, foreign buyers increased their market share in both new and established housing markets for the first time since late-2015.

In Q4, foreign buyers accounted for 10.9% of all new property purchases (10.2% in Q3) – the highest level since Q1’16. In established housing markets, their share rose to 7.6% (6.4% in Q3) – the highest level since Q4 2015.

In new property markets, foreign buyers were noticeably more prevalent in VIC, where their market share of sales rose to 19.3% (15.0% in Q3).

In WA, their market share grew to 9.3% (6.6% in Q4). Interestingly, the share of foreign buyers in WA has been climbing steadily since Q2’16, suggesting foreign buyers may be seeing greater value as local prices fall.

Foreign buyer levels were however broadly unchanged in NSW at 8.1% (8.0% in Q3) and fell in QLD to 9.2% (10.5% in Q3) to its lowest level since mid-2014.

In established housing markets, the share of foreign buyers increased to 10.8% in VIC (8.5% in Q3) – its highest level in over a year – and 8.4% in NSW (7.2% in Q3). Foreign buyers were also a little more active in WA (5.4% vs. 5.2% in Q3), but were less prominent in QLD, where their market share fell to just 5.0% (5.7% in Q3) – the lowest since mid-2012.

Around 55% of all property purchases made by foreign buyers in Q4 were for apartments, 30% houses and 15% land for re-development.

But these ratios varied quite a lot by state. In VIC, around 47% of sales were for apartments, compared to around 59% in NSW and QLD and 52% in WA. In contrast, around 33% of foreign purchases in WA and 32% in VIC consisted of houses, compared to 27% in NSW and 31% in QLD. Just over 1 in 5 (21%) properties purchased by foreign buyers in VIC were for dwellings/land for re-development purposes, compared to just 11-15% in all other states.

By price point, around 30% of apartments purchased by foreigners were valued at less than $500,000, and 45% were valued at $500,000-$1 million. Around 16% were for apartments worth $1-2 million, 7% for properties worth $2-1 million and 3% for apartments over $5 million.

Around 41% of apartments sales in QLD and 42% in WA were for properties under $500,000, compared to just 20% in NSW and 30% in VIC. Property sales in the $500,000-$1 million range varied from 47% in NSW t0 40% in VIC.

At the prestige end of the market, around 11% of property sales in NSW and VIC were over $2 million, compared to just 6% in QLD and WA.

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.