Is the foreign investor really foe?
With interest rates a talking point for many commentators in the Australian property market, growth in property prices may now be front of mind for many Australians. Two strong years of growth in many segments of the property market, along with a perceived increase in foreign investment activity, has raised questions around affordability. In particular, it appears that there is a fear that prices may be running hot, and that foreign investors may be squeezing domestic buyers, particularly first home buyers, out of the market.
This may have prompted the Federal Government’s release of a paper outlining a proposal to address housing affordability in Australia. The proposal included the recommendation to charge increased fees to foreign investors wishing to purchase Australian property, and also to impose heavy fines for anyone not abiding by the relevant regulation.
While I am in favour of efforts that help to ensure that foreign investors abide by Australian laws, I would not wish to support actions that may potentially weaken Australia’s relationship with foreign investors. I believe that, if implemented, the Government’s recommendations may not necessarily increase affordability. However, they may potentially deter some foreign investors from considering Australia as a destination for their investment. As a long-time supporter of foreign investment in Australia, and all of the economic benefits to Australia that this can provide, I believe it would be detrimental to risk damaging an important component of our economy.
It is fairly clear why Australia is a favourable investment destination. Our democratic government, reliable legal system, stable economy, and excellent track record through the GFC, all contribute to a fairly favourable investment climate. It’s my belief that simply hiking fees and imposing heavier fines on foreign investment is not the answer to the question of housing affordability.
1. Foreign investors are a very small part of the market
Recent data provided by the Reserve Bank of Australia (RBA) suggests that foreign investment into Australian residential real estate only accounts for a very small segment of the overall market – around 3% of the value of dwelling turnover in Australia over the last decade. It also suggests that only around 2% of the total number of properties turned over during this same period involved foreign investment. It seems to me that foreign investors could not be responsible for making real estate unaffordable for domestic buyers, as they represent such a small portion of the market overall.
2. Foreign investors mostly occupy specific sectors of the market
It’s my understanding that a fair amount of foreign investment activity is concentrated in quite specific market segments. This typically includes new dwellings, off the plan developments, and properties located in the central business districts of capital cities. Therefore, the properties purchased by foreign investors are, more often than not, sitting at the more expensive end of the market. This suggests that foreign investors may not be affecting affordability for first home buyers, as this group is more likely to purchase at the lower end of the market. It also indicates that foreign investment is actually contributing to demand for new construction, which is a very positive situation in my mind.
3. Housing supply and planning may have a greater effect on affordability
I would argue that a more effective strategy for improving affordability in the Australian housing market could be to look to the supply side of the equation. There has been much discussion regarding whether there is currently a shortage of housing supply, and I would generally agree that this may be the case. It is fairly well known that the planning and approval phase of developments can sometimes be lengthy. If this was to be reduced, however, and if new land was to be opened up for development, I believe the housing shortage could begin to be addressed. Ideally, this would go hand-in-hand with innovative and smart planning to make good use of available space, and to ensure consideration is paid to transport options and sustainability.
Owning a home is a dream for many Australians, and I believe there should be continued discussion around the affordability of Australian real estate. Naturally, foreign investment will play a part in this discussion. However, as highlighted, I do not believe that this should be the primary focus of the debate.
Charles Tarbey is the chairman and owner of Century 21 Australasia www.century21.com.au and Century 21 New Zealand www.century21.co.nz