Don’t blame foreign investment for rising house prices

Republished with thanks from The Conversation

One question that arises on the topic of real estate is the scale of foreign investment and ownership in Australia. It is understandable that the public has concerns about such investment, especially as precious little information is available.

An interesting case arose late last year as Chris Vedelago, The Sunday Age’s property reporter, used a Freedom of Information Act (FOI) request in an attempt to gain some insight into this issue. The target of the request was the Foreign Investment Review Board (FIRB), a government agency tasked with tracking, reviewing and approving submissions for investments of all kinds in Australia.

The reason for the FOI request is that the FIRB is notoriously opaque (non-transparent) in ensuring detailed data on foreign investment are made available to the public. The annual reports provide some basic aggregate statistics but do not release enough information, for instance, the number of temporary residents who have purchased residential real estate and those who have violated investment regulations. Unfortunately, the FOI request revealed little as the FIRB refused to budge.

Vedelago noted this behavior to be political in nature, as discouraging disclosure of relevant details limits the backlash over the perception foreigners are purchasing large amounts of property, causing prices to rise and reducing the options of Australian citizens (though the majority who own property would benefit).

With Australia’s economy appearing relatively strong on the global stage, foreign investors may see the real estate market as attractive, especially given the rapid run-up in property values (approximately 130% adjusted for inflation and quality from 1996 to 2010). Foreign investors likely heed the comforting statements by mainstream commentators who claim housing prices are based upon underlying fundamentals, or intrinsic value.

From what little data the FIRB provides in its latest annual report (2010-11), a picture emerges that is at odds with the conception that a foreign horde is responsible for a flood of investment into the real estate market.

In financial year 2010-11, the FIRB considered a total of 10,865 applications, covering all industry sectors (agriculture, forestry and fishing; finance and insurance; manufacturing, mineral exploration and development; resource processing; services; tourism; and real estate). 4,606 (42%) were approved unconditionally, 5,687 (52%) approved with conditions, with the rest rejected, withdrawn or exempt.

The real estate sector was the primary target of investment, with 9,771 (96%) of all applications. While clearly dominating the number of applications, real estate investment comprised only $42 (23%) out of $177 billion of investment across all sectors. This is due to the relatively small nature of investment in real estate, compared to the larger scale of business investment. For instance, mineral exploration & development garnered the most investment at $55 billion, albeit with a tiny number of applications at 222 (2%). Next was the service sector at $48 billion with 117 (1%) applications, followed by the real estate sector.

The overwhelming majority of real estate applications were for the residential sector rather than commercial sector, at 9,556 (98%) and 215 (2%), respectively. While the number of applications is overwhelmingly lopsided, both residential and commercial sectors received the same amount of investment at $21 billion. Within the residential sector, 3,885 (41%) applications were for existing properties and the rest for purposes of property development at 5,671 (59%).

Interestingly, Victoria was the target for most real estate applications, at 4,398 (45%), with New South Wales coming in at a distant second with 2,598 (27%). Given Victoria’s 2.2 million dwellings, with an estimated 40,000 new dwellings constructed last year, the number of applications amounts to 11% of all new dwellings, a fraction compared to the total dwelling stock.

Clearly, the vast majority of ownership within the real estate sector is domestic. The top country by investment in this sector is the UK at $4.6 billion, followed by China at $4.1 billion, and the US in third place with $3.4 billion. China headed the pack with the largest number of applications across all sectors, at 5,033 (47%) of the total.

Chinese investors may perceive Australia’s property market as a store of wealth, especially considering the relative stability of the Australian government and economy. The steadily growing Chinese economy has produced 535,000 millionaires as of 2010, outnumbering Australia’s 193,000. The growing ranks of these high net worth individuals could be a driver of foreign investment into Australia, though this cannot be confirmed without comprehensive data from the FIRB.

As noted, this has resulted in concerns about foreigners “interfering” in the health of the property market. The evidence, however, shows that foreign investment in real estate is relatively small. Apprehension of Chinese influence (the “yellow peril”) is unwarranted, as the US and UK are collectively responsible for double the amount of Chinese investment.

It is impossible to mount a case that foreign investment is a driver of increasing housing prices. This is no different to the National Housing Supply Council suggesting that homeless people and caravan park residents are a cause of an undersupply, pushing up prices. The blame game in the US says that the Chinese were partially responsible for the housing and financial crises on the basis that the Chinese government’s purchases of US bonds kept interest rates artificially low, setting off the housing boom.

Blaming foreigners for astronomical prices is nothing but a scapegoat for the policies enacted by government on behalf of bankers and landowners that makes housing unaffordable. Those who are discontented with the current states of affairs should focus their attention on our own government rather than searching for foreign influences.

8 Comments

  1. jimmy01-08-2012

    go to any auction in leafy part of Melbourne and there is a definate asian influence – certainly more so than US/UK (i know having been outbid twice by what were Chinese families ie grandma / parents / kidds). Like a lot of these things the devil is in the stats and the definitions of what is a foreign investment eg does it include Chinese students buying a house with money from their parents on the mainland. And given immigration is so high in Aus, surely recent immigrant house purchases can loosely be defined as “foreign”. Foreigners are not the only influence, but they have helped the bubble, no doubt about that. I don blame them, but the govt’s duty is to existing Australians.

  2. Prahran01-08-2012

    Jimmy, you simply decided they are Chinese because they looked Asian. That is unfair and narrow minded because Chinese/ Asians looking people could also be Australians too. You see them in the auctions because you can’t tell other foreigners/ migrants who are White. Therefore targeting/assuming Chinese is the cause of high property price is not quite right and unfriendly . You should also look at people from Europe who buy properties here for their relatives in EU first. A flat here in Perth opened for inspection not long ago. A UK couple came for their friends in UK and asked for 2 units. Interesting thing was the couple got the info from overseas. So how do you comment on this.
    There is no doubt that some foreigner students used the money to buy in Australia but don’t forget they also out bid other you called Asian/ Chinese who live here too.

  3. Claire Fischer01-08-2012

    With any luck the removal of LAFHA, discussed here…

    http://tinyurl.com/dxxnd7p

    Will provide the benefit of less foreigners propping up the real estate market so this ponzi bubble can finally burst!

  4. jimmy02-08-2012

    Prahan,
    I can tell from the accents whether they are recent immigrants. And i’m not singling out any particular race, its just that certain people have the spending power at the moment. The brits and the americans generally dont have the power as their currencies are not so strong anymore and their housing markets are weaker – they come over here and have a heart attack when they see our prices. My brother is married to a singaporean and funnily enough the singaporeans have the same complaints about chinese buyers (and their govt has finally done something about it with more restrictions).
    BTW, 5 years ago I was making the exact same complaints about Brits coming over here with their currency when it was 3 to 1.

  5. Bobby Fischer03-08-2012

    Claire Fischer – please desist in posting URL links that go to Australian Property Front and hiding them as a tinyurl.

    For anybody who wishes to educate themselves, APF is most probably an astroturfing operation with a fictional administrator – see here:

    http://bubblepedia.net.au/forums/viewtopic.php?f=32&t=194

  6. D. Exeter03-08-2012

    Nice pickup Bobby. APF looks like something definitely to be avoided: I recall they used to spam the online news comments with their drivel. I’m guessing links are blocked so they have to resort to URL shortening services.

    Nothing has obviously changed, and it looks like it’s still full of juvenile banter and conspiracy nutcases.

  7. Karl Fitzgerald
    Karl Fitzgerald10-08-2012

    Bobby you are doping some top work there. Keep it up

  8. J. D. Catlin12-08-2012

    What is Mr Soos racial background/objectivity ? The self serving arguments on behalf of non-australians and foreign investors generally cannot be propped up by the lame statistics served up in this article. We all know that after opening the flood gates Rudd shut down the statistical collection on foreign activity. Before real estate agents (PR simpletons that they are) knew what the popular counter reaction would be be they were proudly crowing about the massive contribution to demand (and therefore prices) that foreign investment was creating. They were also proudly stating that the chinese liked to “landbank” – tie up property so locals could not use it. It was all there in the media being openly written about before the “oops” penny dropped and the key commentators started to sing in usinson “shhhh”. All this for poor Melbourne, now the 8th most expensive city in the world and with a housing crisis, now gridlocked roads and an increasingly balkanised society like Sydney. The fact is our eastern suburbs – the houses we used to live in – are quietly filling up with asians while we are being told “don’t be so selfish live in a nasty overpriced concrete cell marketed as an “apartment”. Good bye pets, sheds, gardens, barebeques, backyard cricket etc. Oh sorry – not allowed to discuss this because since people of another race are involved this is racist. Forget any of the facts just mentioned. Is that a knock on the door ?

Leave a Reply

*
*

https://prosper.org.au/2012/08/01/dont-blame-foreign-investment-for-rising-house-prices/