‘Foreign Investment is killing the Australian property market for local buyers’. It’s a serious statement, and one we are seeing more and more often in the news and over social media. But what is the real impact of foreign investors?
It almost seems unnecessary but let’s quickly discuss what Foreign Investment is. When somebody from overseas decides to purchase property in a country that is not their own they are considered a foreign property investor. According to NAB’s quarterly residential property survey from October last year, 19% of apartments and 14.9% of new homes were purchased by foreign buyers. Why does it happen?
Other than money, there really isn’t all that much stopping foreign investors from building or buying property in Australia. The Foreign Investment Review Board is meant to regulate how much foreign investment comes in, however a parliamentary inquiry from 2014 found that no cases were reviewed since 2006. The reason? Perhaps a lack of resources, or perhaps an alignment with the government’s increasingly global view on investment within the country. In August of last year Joe Hockey actually acted on this report, forcing the sale of properties in Sydney’s East.
Of course a poorly performing review board is hardly the sole reason foreign buyers come to Australia. Favourable exchange rates, a lack of local property opportunities, investment stability, strong economic growth and tax incentives are the main logical reasons for foreign buyers to come over. On top of this, emotional reasons also drive foreign purchase. Chinese investors have significant political motivations for getting to Australia, as well as a desire for a Western Education for their children. Now add on the fact that the Yuan’s value has risen in comparison to the Aussie dollar and you have a pretty clear picture as to why Chinese investors are jumping ship on their local areas.
But enough about why, what does it mean for us?
Think about a stack of dominos all lined up, just waiting for somebody to smack the first one over. That is effectively what happens when considering unregulated foreign property investment. If you let foreign investors purchase property without constriction, you increase the demand for property. When you increase demand and keep supply relatively constant, price increases. Another effect is this sense of urgency that comes with foreign purchase. Imagine you are looking at buying an apartment off the plan only to find that 15% of a complex has been bought by foreign investors! Suddenly there is a frenzy among local buyers, who try to jump on any property they can afford (or think they can afford).
Of course the effect keeps on going though. If you could sell your home for $1,000,000 rather than $800,000 you would obviously do it. By creating this frenzy with local buyers, as well as having a consistent drip of foreign buyers in the market, your prices don’t drop because they don’t need to. So long as people are buying houses the market will not correct itself.
The frenzy doesn’t just stop with locals though. Foreign firms who have spotted an opportunity for making serious profits in apartments find themselves buying land at prices local developers wouldn’t consider. Before long all of these foreign developers find themselves out of pocket as they have contributed to an oversupply, itself bringing about a slowdown in the market, which from there makes the property cycle kick into a new stage.
What is the solution?
One solution could be for the Foreign Investment Review Board to be more effective, slowing down foreign investment and making house prices flatten out a bit, helping local first home buyers break into the market.
What would your solution to Foreign Investment be? Let us know in the comments section below!