http://www.news.com.au/finance/real-esta...id=5046069
Housing affordability: Are foreign investors to blame for Australia’s high property prices?
• 1 HOUR AGO DECEMBER 13, 2014 9:57AM
Our views on housing affordability
AUSTRALIANS are finding it increasingly difficult to fulfil the Great Australian Dream: To buy their own home.
Residential property prices have gone through the roof over the past three decades, particularly in our capital cities. Prices are so expensive that everyday Aussies, especially first home buyers, are being pushed out of the property market in their droves.
One theory consistently put forward to explain the high prices is that the market has been flooded with foreign investors. They fly in with packed wallets and are willing to pay top dollar, locking out the locals.
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The federal government launched a parliamentary inquiry to look into this theory and its findings may come as a surprise.
So, are overseas buyers really to blame for Australia’s astronomically high house prices?
WHAT DID THE INQUIRY FIND?
Buying a first home can be a struggle for younger Australians. Source: News Corp Australia
For starters, the inquiry agreed that house prices were getting out of control.
Combined capital city home values have increased 13.2 per cent in the 21 months to January 2014, according to real estate data company RP Data. Meanwhile, an International Monetary Fund report from last month found that the ratio of housing prices to average incomes is 31.6 per cent above the historical average in Australia.
The inquiry heard evidence from a range of sources, including members of the general public and industry experts, to explain the price hike.
Most of the concern about foreign investment came from personal submissions, while industry stakeholders tended to argue that the general population overstated the impact of overseas buyers.
Ultimately, the report concludes that there is no solid evidence to support the idea that foreign investors are driving up prices.
It acknowledges that reliable data on the issue is scarce but finds that, overall, foreign investment is good for Australia.
The report states that overseas buyers actually help to make housing more affordable because their investment boosts the economy, provides jobs and — crucially — encourages new homes to be built, increasing housing supply.
“The evidence points to a continuous lack of supply in Australia as a key driver of price increases,” the report states.
“Importantly, foreign investment is regarded by industry experts as vital to increasing this supply.
“Rather than causing price pressures, the evidence suggests that foreign investments may actually help keep prices lower by increasing supply.”
Foreign investors can actually help to drive prices down. Source: News Limited
Some contributions to the inquiry expressed concerns that overseas investors made it especially difficult for first home buyers to break into the market. But industry experts argued that foreign investors tended to buy properties that were out of the price range of local first-time buyers.
The Master Builders of Australia told the inquiry that foreign investors and first home buyers rarely competed for the same properties.
Foreigners tended to preference new, high-density, inner-city properties, often close to universities. And they tended to be valued well above the average national sales price.
Similarly, the Real Estate Industry of Australia said first home buyers favoured established real estate.
“The preference for foreign investors is at the higher end of the market, with a $1 million average for established real estate for temporary residents, and a $647,000 average for individual purchasers of new dwellings … way beyond the reach of an aspiring first home buyer,” spokeswoman Amanda Lynch told a hearing in May.
The Property Council of Australia argues that “there is no evidence that international investment is swamping the residential housing market or influencing prices”.
Exclusive Melbourne agency Nyko Property said the “noise” surrounding overseas investment was “wildly inaccurate”.
“Vision on our television networks of people of Asian appearance bidding at auctions and outbidding other Australians does, in our opinion, simply kindle xenophobia and is anathema to the long-term goal of Australian policymakers to further integrate our economy with Asia — the fastest-growing economic region in the world,” its submission stated.
The inquiry concluded that the industry experts were correct.
“The committee is also satisfied from the evidence received that foreign investment is not causing the market distortions that have been advocated in some quarters, particularly for first home buyers,” the final report states.
“This is because foreign investment levels are not large enough to do so overall because overseas buyers mainly operate at a different price bracket from first home buyers and buy different types of properties.
“The housing supply issues that have been ongoing in Australia would worsen if foreign investment was curtailed.”
HOW DO FOREIGN INVESTMENT RULES WORK?
Auctions for inner-city properties can be fiercely contested. Source: News Limited
● Non-resident foreign investors are not allowed to buy an existing home, but they can buy new homes
● Foreign people living in Australia for no more than 12 months can buy one existing home, but they must live in it and sell it when their visa expires
● All purchases must be screened by the Foreign Investment Review Board
HOW MUCH FOREIGN INVESTMENT IS THERE IN AUSTRALIA?
There is limited data about exactly how much foreign investment there is in Australia. Source: News Corp Australia
Figures are limited, but the Master Builders of Australia estimate that foreign investors account for 5 to 6 per cent of the Australian housing market.
Property developer Meriton said overseas buyers represented closer to 2.5 per cent of annual sales.
Foreign Investment Review Board figures show:
● Between July 2013 and March 2014, $24.8 billion in foreign investment has been approved
● This was 44 per cent higher than the $17.2 billion approved in 2012-13
● Between July 2013 and March 2014, the FIRB approved the purchase of 5755 existing properties
● In 2012-13, this figure was 5101
● Most of the investment is in Sydney and Melbourne
According to the Property Council of Australia, “There is simply not enough foreign investment to skew the residential market as a whole”.
SO, WHAT IS MAKING HOUSES HARD TO AFFORD THEN?
Housing is increasingly becoming out of reach for everyday Australians. Source: ThinkStock
There is no one explanation, but a lack of housing supply is the most commonly cited reason for high property prices.
Other factors that the report notes have a larger impact on prices than foreign investment include:
● Strong population growth and higher per capita incomes
● Australians’ ability to take out larger mortgages due to greater access to cheap credit
● The scarce availability and high cost of land to develop
● Low interest rates
● The strength of the economy
● State and local planning regulations and red tape
● Stamp duty and tax arrangements
Financial adviser SMATS Group said Australia’s population growth had increased demand.
“The general community does not fully appreciate that the main driving force in property price increases is Australia’s growing population, which rose 1.8 per cent to the year 30th September 2013,” the company states in its submission.
“This equates to an additional 405,400 people and places enormous pressure in the property market for homes to accommodate this rising tide.”
The Reserve Bank of Australia argues that our historically low interest rates have increased the attractiveness of investing in “riskier, higher-yielding assets, resulting in strong demand for residential property”.
The Real Estate Institute of Australia argues, “Addressing housing supply would avoid any future questioning about impact of foreign investors in residential real estate”.
The Property Council of Australia said Australians were being priced out of the market by other Australians.
BUT IS THAT THE WHOLE STORY?
The inquiry found that foreign investors can make an impact on the margins of the market. Source: News Limited
The report acknowledges, however, that foreign investors may have an impact in pockets of the market.
“At the margin, foreign purchases may be pushing up prices in particular segments of the market, such as high-quality new apartments in Sydney, Melbourne and the Gold Coast. However, even these markets are dominated by local purchasers,” Meriton states in its submission.
Christopher Kent of Reserve Bank said it was “hard to deny” that foreign investors were having some impact.
“If you imagine an auction on a weekend where you throw in an extra buyer who is willing to pay a little bit more than everyone else there, if that buyer happens to be foreign, maybe as a temporary resident, and they are buying a single play that they are able to get approval for, it is hard to deny that it would not push up the price,” he told a public hearing in June.
While the report concludes that foreign investment is good for Australia, it did find that the rules surrounding overseas buyers were not enforced or policed properly.
It also noted that there was no accurate or timely data that tracks foreign investment.
It recommends introducing a penalty regime to punish those who breach the regulations, including third parties that knowingly help investors to break the rules.
It also recommends setting up a national register to record the citizenship and residency of all home buyers.
Higgins federal Liberal MP Kelly O'Dwyer said foreign investment rules had been poorly enforced. Source: News Limited
Committee chairwoman Kelly O’Dwyer said the foreign investment rules were sufficient but their application was “severely lacking”.
“I regard the current internal processes at the Treasury and FIRB (Foreign Investment Review Board) as a systems failure,” Ms O’Dwyer said.
“Most concerning is that sanctions seem to be virtually non-existent.”
The report found that there had been no prosecutions for breaching foreign investment rules since 2006 and no orders to sell off properties bought by breaking the rules since 2007.
“It defies belief that there has been universal compliance with the foreign investment framework … since 2007,” the report states.
Ms O’Dwyer suggested that there were investors breaking the rules, but that they had slipped through the regulatory cracks.
“Suggestions by officials that (the lack of prosecutions) is due to complete compliance with the rules is simply not credible,” she said.
“Australians must have confidence that the rules, including those that apply to existing homes, are being enforced. Our inquiry revealed that, as it stands today, they could not have that confidence.”