How foreigners are shaping the property market

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By Catherine Cashmore, a market analyst and journalist with extensive experience in all aspects relating to property acquisition. Follow Catherine on Twitter or via here Blog.

Investment bank ‘Credit Suisse’ couldn’t have coined it better when they asserted:

The marginal buyer of Sydney and Melbourne real estate has changed, as have the drivers of property prices.

The words are taken from their recent report on international investment into the Australian residential real estate sector, with the intention to highlight potential opportunities for future speculation. And the statement is correct.

Anyone, who is in the business of buying or selling property, is acutely aware how the push and pull of both supply and demand in our property markets has been markedly shaped by both a change in the local demographics of our nation, along with international competition in recent years.

The roll over influence on values in concentrated regions of our largest capital cities has, in some cases, been significant. And whilst it remains the subject of much angst for those priced out, I have yet to meet a seller who did not welcome this increased competition, or stage some sort of active public protest.

However, heated debate in the main stream media, around what has long been known in the industry as little more than a ‘tick box’ formality, designed to detract from what remains a largely unaudited system of ‘non resident’ investment in Australian property – residential or otherwise – by the Foreign Investment Review Board, has been going on since 2008.

As property editor, Robert Harley recently pointed out in the AFR;

“…even the ‘experts’ find the FIRB annual report…. tardy, lacking in meaningful detail and hard to reconcile with their own experience…

And as the fictional character “Chodley Wontok” discovered last year, claims in the foreign policy document that applications are reviewed against the “national interest,” on “a case-by-case” level, do not go so far as a mere passport or visa check!

However, the sheer hysteria around this subject needs to be bought under control. And if we’re to make sure policies are correctly regulated and work in the national interest as ‘spruiked,’ the blame needs to be carefully targeted to areas of influence – namely, policy.

Something the Government has to date, repeatedly failed to do.

A policy disaster.

Following the 2008 crisis, when Kevin Rudd decided to put in place measures to prevent any major deleveraging of household debt, one of these was to openly advertise ‘relaxed’ regulations around the acquisition of residential real estate for temporary residents, companies, and developers selling solely to overseas buyers.

Whilst the wisdom of such a move was debatable, what followed was a truly disastrous state of affairs.

Attempts by Walkley Award winning journalist, Chris Vedelago, to obtain accurate data under the freedom of information act, to monitor the level of increased demand being widely asserted by industry advocates – was repeatedly frustrated.

According to the then Assistant Treasurer, Senator Nick Sherry, any effort to establish a greater understanding of the FIRB’s compliance system, was not in the public’s “best interest.”

Instead, the Government – then panicking over the consequential effect to their ratings in the polls – came up with the incredibly smart idea of a ‘dob-in’ hotline.

The hotline was designed to enable worried locals to report those dubious looking foreign nationals who were cleverly disguising themselves as local buyers and naughtily ‘bidding up’ neighbourhood prices.

That would put a stop to it! *Thought Kevin*

Unsurprisingly, from the limited number of calls received (although, once again, probably not from those vendor’s who were happily selling their properties in the rapid run up to the market peak of 2010,) most turned out to be Australian citizens and long standing permanent residents. So, it did little – if anything – to stem the core of concern still prevalent within the community.

It is therefore of little surprise that anecdotal stories from agents, who maintain official figures are under reported and rules are being flouted, continue to carry more weight. And a debate, which now walks a fine line between being termed racist or otherwise – continues unabated.

What’s going on?

Rising property prices – the product of the plot of land that sits underneath the structure – are unashamedly promoted in most modern economies as the key driver to boost the privatised wealth of its nation, with the hope the payoff effect will feed other areas of consumption.

They are no longer just ‘national’ affairs, but open to international speculation and investment, of which Australia is by no means immune.

When the Federal Government states in its policy document that it “welcomes foreign investment” which:

“…has helped build Australia’s economy and will continue to enhance the wellbeing of Australians, by supporting economic growth and prosperity..”

You can assume toward the top of that list is the investment into the land market – residential or otherwise. And as official figures show, few – if any – applications are ever turned down and real estate captures the majority interest.

The recent recessions that have occurred in other countries as a result of their own residential speculative booms, have merely accentuated these international patterns of investment and migration.

For example, following the GFC, the number of foreign-born workers leaving Britain rose by nearly 30%, as the Government set about removing 300,000 skilled jobs from the list of positions open to workers from outside the European Union – evidently fearing political backlash from somewhat unsubstantiated claims, that this was significantly ‘harming’ British jobs, and thus not aiding rising unemployment or the economy as a whole.

At the same time, distressed nations opened their doors to opportune investors from around the globe, who were encouraged to take advantage of now uniquely ‘cheap’ real estate markets, in a vein attempt to kick off a ‘recovery’ in their own local terrains.

It was only a few years ago that stories were littering the main stream media highlighting the surge of demand for USA properties, as ‘spruikers’ made benefit of our strong Aussie dollar, to lure local investors to purchase previously owner-occupied foreclosures, and instead, turn them into investor owned speculative rentals.

None of this has assisted the home buying sector in America’s property market.

Ownership rates continue to fall, and local buyers remain priced out.

But the Government cares little – the gains in property are the ‘silver lining’ Obama needs to maintain popularity. And he had no hesitation in boasting as such when he recently stated:

”Today, our housing market is healing!” (Healing!) “Home prices are rising at the fastest pace in 7 years…”

(Faster even than incomes it seems, with first homebuyers at their lowest level since the crisis began.)

Premium localities in the cities of New York and London are openly marketed as ‘safe havens’ for the internationally wealthy. Isolated from the local economy, as local workers are forced out, and rumours of homes laying vacant for much of year provoke neighbourhood outrage.

It’s now reported, for every minute you spend on the three Underground stops between Earls Court and Sloane Square, property prices rise by £96,647.

However, (as with Australia,) outside of half hearted central bank ‘don’t spend too much’ warnings, there is little rush to limit the inflationary rises.

This pattern is always the same. It’s allowable to let productivity and industry fail whilst small businesses suffer, but woe to the Government who allows the privatised ‘wealth’ fund of its aging population endure any such demise.

Australia’s changing landscape

Australia is internationally marketed as the ‘lucky country,’ an economic star on the world stage, from which we derive much benefit.

Population growth throughout the GFC was barely dented – and like every other country, we tow away the poor, whilst targeting skilled migrants, or those with dollars to invest.

Over the last census period alone, Melbourne’s population expanded by nearly 355,000 new residents, and continues to grow at pace of roughly 2% per year.

Additionally, its population has grown in diversity, with the traditional European migrants of Greece and Italy falling as a proportion, whilst the growing number benefitting our shores now come from both China and India.

(Settlers = skilled and family reunion migrants, along with humanitarian visas and refugees)

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The same trend is mirrored in NSW – projected to reach 8.4 million by 2060. Migrations to the famous harbour town also come increasingly from both China and India, as demonstrated below.

ScreenHunter_1592 Mar. 11 07.33

When, under Julia Gillard, the Government commissioned a ‘White Paper’ on ‘The Asian Century’ designed to:

“…generate a set of general propositions to guide policy development over the long-term..”

The importance and potential magnitude of Asia’s dominance on the world stage was emphasised, by Julia Gillard when in a speech she asserted:

“We are now seeing the most profound rebalancing of global wealth and power in the period since the United States emerged as a major power in the world.”

No Kidding!

Indeed, it would be hard to over-estimate the economic force Asia holds for our local economy.

It will shape the most important social, cultural, business, domestic and foreign policy implications we will face in the decades to come.

By 2025 the Asian region will account for almost half of the world’s output and also be the world’s largest consumer – and if we play our cards right, Australia is best placed to advantage.

It’s not just the 1% of billionaires seeking out safe haven’s abroad, in what’s been termed the “largest and most rapid wealth migrations of our time.” But the rise of China’s ‘Consumer Class’ – ‘middle income’ individuals, discretionary spenders, whose wealth goes largely under-reported in a “grey economy” of illegal and quasi-legal activities.

If trend continues, in a few years, China will become the world’s richest country, and India won’t be far in its wake.

The number of Asian students studying on our shores is at record highs.

Trade flows, research and business development, education, tourism, and increased levels of migration have benefited us significantly in recent years – and the potential to capitalise on the productive sectors of our economy remain.

Whilst the Gillard Government’s white paper – now firmly locked into “archive status,” – remains a useful form of reference. It was widely criticised at the time for its vague approach as yet ‘another’ study, which like a PHD paper, is good in content, but lacks any hint of direct action.

It claimed that Australian manufacturing was expected to ‘grow,’ with wishy-washy advice on how firms must:

‘”..adapt by anticipating changes in their markets, building the talents of their people and constantly innovating and lifting their productivity”

Claims, which now seem laughable.

We allowed the profits from the ‘once in a century’ mining boom to fall into private hands.

As Sydney Morning Herald’s Economics Editor Ross Gittins recently clarified in his commentary on Abbott’s efforts to remove the ‘mining tax.’

“There is a lot of ‘unearned’ economic rent associated with the exploitation of limited mineral deposits,” and countries like Australia would be “mugs not to tax much of that rent rather than letting largely foreign companies walk away with most of it.”

‘Mugs’ we are.

But what about land?

Asia’s influence is marketed as positive news. However, the one area that receives the most overwhelming negativity is in relation to our real estate market, precisely because of some of the issues hinted in the paragraph above.

We have little, if any, understanding of the accumulated wealth being brought into the country, and recent settlers have little experience with the local market, or misleading practices surrounding real estate price quoting.

This lack of transparency and education within the industry itself needs addressing, however, it’s a subject I’ll explore further in another column.

The geographical location of land is fixed and limited in supply. Therefore we can’t all benefit from economic advantage gained from ownership of the best seats in town, without effective taxation of the resource that is.

A correctly administered broad-based land value tax (as explained here – reducing taxes on productivity) would not only encourage the ‘good’ utilisation of land, but if handled efficiently, gains could be fed back into the community to assist increased investment into infrastructure and social services.

This would further aid both the expansion and development of our cities, with the flow on effect ideally taking the speculative element out of the housing market, and assist in reducing its destructive influence on prices.

This alone, would go a long way to reducing the wealth inequality currently experienced in our big cities.

Presently, we’re doing a great job of building an abundance of cheap, high density, and not so inexpensive apartment blocks, full of small one and two bedroom flats, often no more than 60 square metres inside. Great for student renters – but they do little to meet the needs of our biggest residential sector – family buyers with children.

Therefore, the above issues all need to be tackled from ground up policy reform – significantly on the supply-side.

Offshore investment must be solely channeled into creating new supply – and audited to ensure the conditions stated in current laws are being adhered to.

I’m not holding my breath, but hopefully some of these will be explored in detail and ‘maybe’ go so far as being implemented following the Senate Inquiry later this year.

We can’t – and wouldn’t want to – stop migration. But we can ensure wealth invested in our established real estate market is utilised effectively.

21 Responses to “ “How foreigners are shaping the property market”

  1. squirell says:

    I can tell u that foreign Chinese are the only thing driving the market in surrey hills. Went to auction on Saturday, 5 bidders, all appeared to be Chinese due to appearance/ dress/ accents. Price pushed 300 k above reserve. A tragedy. Yes they might be students, recent immigrants, long term residents Tec etc. The point is, its Chinese money that’s driving the market whether via legal / illegal means.

    We can’t St this completely, but we can
    Reduce immigration to normal oecd levels
    Ban sales to students
    Make suggested tax changes.

    Think of your kids

  2. drsmithy says:

    There was a question on Q&A last night about Chinese buyers driving up local prices.

    Unfortunately it got shut down pretty quickly with the “racism” response. Then everyone proceeded to tut-tut about housing affordability and that was that.

    (With that said it wasn’t really a good panel for that kind of question.)

    • Schadenfreude says:

      Seriously why even bother watching Q&A….

      Every show consists of a bunch of morons discussing non-issues and any important issues that gets raised is quickly shut down.

      • Jake89 says:

        Yep. There’s a lot of good sentiment on there, and aspirations, but that doesn’t cut it.

        I think it’s overwhelmingly positive that we want to support anti discrimination.. But when we shut down discussion on a topic involving race, regardless of whether it is discriminatory, we are doing ourselves a disservice

        It’s like you mention race to a PC person and their emotion kicks in at the expense of their reason

    • The Patrician says:

      Shadow Treasurer Chris Bowen’s flaccid contribution was particularly worthy of condemnation.

      The opposition are struggling to gain traction on just about any topic. As with his last Q&A appearance with Ponzi Joe, Bowen is presented with an prime opportunity to present a coherent argument on housing supply. What does he do?
      A. Call for FIRB explanation/review/overhaul of foriegn purchases of existing properties? No
      B. Call for release of more land /relaxation of UGB? No
      C. Simplictically conflate FIRB concerns with racism and dismiss the point? yeah, that’ll do.
      Lazy and dumb.

      The ALP has lost its way. Bowen is an empty vessel bereft of ideas. Time for a change, Chris, time for new ideas on fixing high cost housing.

  3. moderate mouse says:

    More supply-side waffle. Kill negative gearing, make the FIRB do its job, and watch the so-called supply side constraints miraculously disappear. As already stated, advocating that an irrational tsunami of demand be addressed by an irrational tsunami of supply is, frankly, irrational. When the tsunami of demand is driven by ponzi-fevered investors (both domestic and foreign), fixing ‘supply constraints’ is just another way for developers to say ‘let’s cash in on this sucker!!’

    • Timon says:

      ‘Watch the so called supply constraints disappear’

      So by adjusting the demand side ‘supply constraints are going to disappear’. So planning law is suddenly going to become liberalised?

      How is fiddling with demand side policies going to create a single extra house? Maybe they might take some heat out of the market but it is not a permanent solution.

      Most demand for housing comes from natural increase in the population – where are these new future households going to be accommodated under the current system of constipated supply?

      UE has shown consistently that only policies that facilitate increased supply result in long term price stability. A case in point is Seoul where urban containment policies have been enacted as well as very tight LVR restrictions. Seoul’s prices continue to bubble.

      ‘…irrational tsunami of supply’

      There would be no such tsunami. If planning laws were liberalised to such an extent as to significantly reduce the expectation of capital gains from housing there would not be ‘an irrational tsunami of supply’ as investors would need to look elsewhere to make capital gains from speculation. In fact, as Catherine has pointed out the current planning system is productive of irrational supply given that the current investor fervour results in developers building 1 and 2 bedroom dog boxes in the sky rather than the types of housing needed by Australia’s largest buying demographic :- families with children.

  4. Franky says:

    Another massive problem is the lack of transparency. Auction results and sale price history should be freely and widely available and importantly accurate.
    You should have to tell a govt dept (or something similar) when your house is going to auction, the result should be published on the same, freely available, website by say Tuesday (pick a day that is timely) following the auction. If a property is withdrawn it should be reported as so, if it is passed in it should have the highest bid reported and laws like the relatively new ones in SA should be in force. Why do auctions have reserves at all? If you want a certain price for a house advertise it as so.
    I work in financial markets and the amount of duty and disclosure is far greater despite housing, for 99% of the population, being the biggest purchase

    • Strange Economics says:

      Why would you need a real estate agent if the price was transparent. What value would they bring for $ 15K if there was no “negotiation skills” (ie secret local market knowledge from delayed/non publication). Who would buy the convertible audis they drive round in then. The car dealers would suffer too.

  5. Strange Economics says:

    Since 1 in 5 people you meet has an apartment and investment flat – NG or SMSF now(or even more strangely an investment flat and rents elsewhere/lives with parents) – there would be enough apartments for FHBs, if there wasn’t a 30-40% negative gearing saving – for which the investors happily pay 20 % more. The winner from this – The Banks, collecting their 2% margin on all these enormous loans (and donating to the major parties election funds…). And in Melbourne, lots of foreign buyers !

    • drsmithy says:

      [...] NG or SMSF now(or even more strangely an investment flat and rents elsewhere/lives with parents) [...]

      It’s not really that strange when you think about it.

      It’s much cheaper to rent than buy (and obviously even more so if you can mooch off your parents), plus the investment property delivers the short-term NG tax benefit.

      Move in at the 6 year mark (or whatever it is), live in there for 12 months to make it your PPoR and then sell it for tax-free capital gains.

  6. greatwall says:

    I understand that PRC Chinese Citizens can only Legally export/send O/S a Maximum of $50K per year. If Mum, Dad and their single child all send $50K a year it would take them 20 years to transfer $3.0 Million to Australia to buy property.

    The PRC Government knows this, the Australian Government should be aware of it and the REA Industry involved in promoting and selling Australian Real Estate to Mainland PRC Buyers would certainly be aware of it.

    And yet hundreds if not thousands of Australian Properties have been sold to PRC Mainland Chinese who seem to arrive with Millions in Foreign Currencies to buy property.

    The money is clearly here Illegally and yet nobody gives a brass razoo. Australian Real Estate is being used to Launder Illegally Exported Foreign Currency out of the PRC.

    Where the money came from in the first place is a whole other issue. Some I would agree has been hard earned totally legally in the PRC, the rest has come from “The State” via a myriad of different and Illegal means.

    However regardless of its source it has all been exported Illegally and Laundered through Australian Real Estate.

    • ronfire says:

      @greatwall

      Do you know if that $50k figure is correct? I thought it was a bit more than that, but don’t have numbers unfortunately.

      Even then, you’re correct. Gotta wonder where the money’s coming from…

      • greatwall says:

        @ronfire

        Lived and worked in PRC for 4 years and I have a Chinese spouse who has relatives back in the PRC. Also a number of my PRC ex-employees are now very comfortably off with local PRC property investments and we get inquiries every now and again looking for O/S “contact” to help them over come the $50K Export problem.

        This group would represent the absolute minimum of PRC O/S Property Investors – they at least earned the money they want to send O/S legally.

        The number is very real and makes a mockery of those trying to legitimize these PRC property investments in Australia and every other country. Sixty Million Millionaires able to move their money quickly O/S and out of the PRC Legally my B&^%*T.

        Australia, Real Estate Money Laundering Center of the World – who needs Paul Hogan.

      • greatwall says:

        @ronfire

        Just to clarify, while I believe that these PRC Property Buyers and how they can actually legally have the funds available O/S to purchases any properties is a real issue, I believe this is all a distraction from the real issue.

        Federal and State, Tax Concessions, Tax Deductions, Tax Perks and Rorts, Tax Subsidies, Handouts and all other Tax Payer Funded incentives provided to speculators/investors in Australian Property and Shares are the root cause of the ridiculously high prices of Australian Real Estate.

        Negative Gearing and its family of related Government sponsored speculative benefits provided to property and share market investors/gamblers needs to stop, as there is no economic or moral justification for their existence and least of all their continuation.

        Not sustainable T&J!

        Now back to the story – PRC property buyers in the Land of OZ.

    • Jake89 says:

      MB, that’s your cue.

    • The Patrician says:

      Mr Pascoe,

      800 words on the benefits of foriegn investment on new housing supply and not one mention of FIRB monitoring and compliance.

      No mention that the largest sector of FIRB approved foreign investment is now in existing dwellings!

      How does foreign investment in existing dwellings improve new housing supply?

  7. N.C. says:

    It’s Australians who have priced Australians out of the market. But no doubt anyone already in the market will be happy enough when foreign money waltzes on up to their auction, and throws in a lazy bid…

    http://www.tunswblog.blogspot.com.au/2014/03/chinese-investment-in-australian-rental.html