The truth about Foreign Investors

By prominent property commentator, Michael Matusik:

Last month's COAG meeting, whilst dominated by health reform, also discussed Australia's housing market. The International Monetary Fund also warned last month that Australia and other countries in the Asia-Pacific region risked a property bubble. Recent website polling suggests that close to 85% of Australians think residential real estate is overvalued, while two-thirds think by as much as 20%. Internet polling, coupled with blog and talk-back replies, also suggests that much of the recent rise in house prices is due to the relaxation in the rules on foreign investment.

Before the new rules came into effect in March 2009, foreigners could acquire up to 50% of a new development via an off-the-plan purchase, and were restricted to a maximum of a $300,000 purchase price for established homes. The new rules have essentially removed these restrictions.

Apparently, these changes have opened up a flood of overseas buyers (read "Asian" - especially Chinese) who are outpricing locals and land banking houses. According to real estate agents, the foreign buying spree is concentrated in the $400,000 to $600,000 range and the luxury end of the market. Most pay cash.

Unfortunately, there is little official data collected on foreign buying, but that which is available suggests that these claims are false. Interestingly, I have collected several recent news stories about the rush of foreign buying; they more often than not feature in the early pages of the newspaper and almost always feature a picture of a property being auctioned. When looking at the mêlée surrounding the auctioneers in these photos, I see very few Asians. Most look lily-white to me.

But enough of the anecdotal, let's review some data at hand.

There are about 400,000 home sales across Australia each year, of which about 7,200 or under 2% are sold to overseas buyers. In dollar terms, the overseas market share is higher at around 10%. Interestingly, over the last 12 months foreign investment applications are down 32%. There appears to be fewer foreign buyers today than before the March 2009 relaxation in the FIRB rules.

This is also the case in Queensland, where just over 1,000 residential properties were purchased by foreign buyers last year, compared to 1,500 the year before. This equates to $407 million worth of real estate compared to $620 million bought by buyers from overseas during 2008. Less than one percent of Queensland's residential property is sold to foreigners. Most overseas buyers come from the United Kingdom, South Africa or New Zealand. Chinese investors represent less than 10% of the Queensland overseas market.

There were 142 settled house sales in the Brisbane southern suburb of Sunnybank over the last 12 months, which is on par with previous years. The median house price is close to $500,000. According to the 2006 Census, 42% of Sunnybank's residents were born overseas. This is high when compared to the one-in-four average across Brisbane. There have been recent reports that overseas buyers are outbidding others in the Sunnybank area. Yet, an analysis of the sales records finds that there were just five overseas buyers during the 12 months to March 2010 in Sunnybank, which is, again, down on previous years. True, three-quarters of buyers have Asian surnames, but this trend has long been established in the area.

In response to growing concerns, whether they are based on perception or reality, the Federal Government, two weeks ago, tightened the rules once more on foreign investment in real estate. Temporary residents will require approval from the Foreign Investment Review Board to buy property; and they will have to sell that property once they leave the country. Other rules will require temporary residents to build on land within two years of purchase.

With international buyers of new homes making up only 1.67%, the results may not be what the rule makers are anticipating. Retightening the rules about foreign residential investment would simply shift the pressure back to rental property. One of the traditional functions of xenophobia is the redirection from the real source of social problems. It is easier to blame sinister Chinese investors for preventing young Aussie couples from getting their start in the property market. Blaming overseas buyers is a convenient cover for a problem that lies much closer to home.

The recent COAG meeting announced a "housing supply and affordability reform agenda", the guts of which is a series of reviews of the housing supply pipeline and government policies that constrain supply or stimulate demand. The bulk of these reviews are not due until mid-way through 2011. More studies, little action!

I am not suggesting that housing supply is a quick-fix issue. The problem has been decades in the making. But it might have reasonably been expected that COAG's "reform agenda" consisted of more than a request for officials to go away and do some more reviews. It's not at all clear that politicians have grasped the level of concern that key stakeholders and the RBA are showing about the problem.

Meanwhile, as tends to happen with long-term structural problems, the growing pressure to do something will manifest itself in short-term, populist solutions. Blaming foreign buyers for distorting the housing market is a case in point.

Source:  Matusik Missive - Xenophobia Rules. 5 May 2010.

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