Foreign Investment

The value of approvals for foreign investment in Australian real estate increased 75% last financial year to $61 billion, with Chinese accounting for two-thirds of applications.

Who are these property tycoons who seem to be immune to rising prices? Let’s dig a little deeper: The average price of an Australian home increased from $490,800 in 2011 to $612,200 in 2015. For buyers paying in yuan, however, the average price paid has in fact declined by $70,000 (to $420,800!) due to the stronger yuan and falling Australian dollar.

What risks does foreign investment pose?

Two Tier Market

Given what I describe above, the potential is that we end up in a two tier market. In other words, the risk is that disparities in affordability spurred by exchange rate fluctuations force prices above fundamental values. Before you all run for the hills, it’s important to note that the risks of foreign investment are very much geographically dependent, with high proportions of foreign money poured into our city centres, particularly Sydney and Melbourne.

Lending Changes

Increasingly stringent funding requirements, particularly reductions in loan to valuation ratios, pose a potential risk for off plan property purchases not yet settled. Foreign buyers, particularly the Chinese, are, however, less susceptible to lending changes given that their net worth averages in excess of $4 million, according to Juwai.

Restrictions on Capital Flight

In China, individuals are restricted to moving the equivalent of $50,000 out of the country each year. Although such policy is not new, the negative impact on the value of the Yuan (converting currency from Yuan to another denomination increases the supply of Yuan and therefore puts downward pressure on the exchange rate) of capital outflows has resulted in increased enforcement of the regulation.  Given the dependence on foreign sales some property developers have, a reduction of Chinese demand is likely to lead to a retraction of future supply, a phenomenon, we’ve now begun to experience.

Final note: Foreign investment poses challenges to some segments of the Australian property market. It is, however, important to be accurate in our discussion of what those risks are and the degree to which those risks present themselves in various markets. Generally speaking, risks are most acute in the centres of our capital cities, areas that our research method has largely led us to avoid.

 


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