Foreign Investment in Residential Property

Posted by Daniel Joseph

Much has been said of late regarding the apparent growth in foreign ownership of Australian residential property being responsible for the surge in property prices. In this week’s article we take a look at the Australian property landscape, paying particular attention to the trends in foreign ownership.

Before beginning, it is important to look back at the policies that made residential property a more viable investment vehicle for foreign purchasers. In December 2008, the Australian federal government announced policy and administrative changes to screening arrangements for foreign investors in Australian real estate, making it easier for overseas purchasers to buy Australian property. The rationale was that increasing foreign investment would help support property prices.

With Australia’s economy appearing relatively strong on the global stage, foreign investors may see the real estate market as attractive. Given the level of media coverage on the topic, one may expect data to reveal an explosion in the proportion of foreign investment. The fact is, the Foreign Investment Review Board (FIRB) approved only 10,118 residential property purchases in 2011/2012. Around 8,000 of these approvals will proceed through to a purchase. This number represents approximately 2 per cent of the total properties purchased in Australia over 2011/2012.

Having said this, foreign buyers do account for a higher proportion of property purchases in some areas, particularly inner Sydney and Melbourne. This has, in effect, created a false economy in these areas by increasing demand, and therefore prices, above what Blue Wealth believes to be their equilibrium levels. The largest increase in foreign ownership has occurred in New South Wales. In the three months to 30 September, 16 per cent of new property was bought by foreign owners (eight times the national average), up from 11 per cent in the previous quarter.

Overall, as long as our population continues to expand, incomes continue to grow, the supply of new property remains low and interest rates remain affordable, property prices will probably continue to grow regardless of the level of foreign intervention. The statistics highlighted in this article reveal that the robust performance of the Australian property market is driven by strong fundamentals rather than the relatively small proportion of foreign investment.

Posted by Daniel Joseph, on 21st Feb 2014