The real risk to the housing market

It isn’t because it is over-priced or because banks have relaxed their lending standards or because interest rates will rise. The vulnerability lies in the growing presence of a certain type of buyer.

Unfortunately there isn’t sufficient data to quantify the extent of their involvement in Australia’s residential property market, Martin North, founding principal and banking sector analyst at Digital Finance Analytics, concluded after delving into the figures available at the Foreign Investment Review Board (FIRB).

A rise in overseas purchasers is one factor driving the market, particularly in Sydney, Melbourne and Perth. These may be Australian residents, overseas purchasers buying property for investment through an approved development, or locals acting for overseas purchasers who are attracted by the sustained house price growth and relative economic stability.

Overseas students studying in Australia can buy properties and foreigners can apply to redevelop an old house if it increases the number of dwellings. Prior to development, no rental income is allowed and construction must commence within two years. As the law currently stands, developers may sell 100 per cent of a new apartment block to non-residents.

From looking at the FIRB’s annual report for 2011/12, North found that overseas purchases of residential investment properties increased by 32 per cent to $19.7 billion in 2012 versus 2008. Of that, $10.92 billion, or 55 per cent, related to 70 developer off-the-plan projects, vastly up from $5.48 billion, or 37 per cent, through 235 projects four years earlier.

“This shows a significant rise in custom development targeted at overseas markets,” said North.

To put those numbers into context, Standard & Poor's Ratings Services has cited Australian Tax Office data that puts residential property investment by self-managed superannuation funds at $17.5 billion, up from $10 billion in 2008.


The flip side


According to North, China registers as the highest number of FIRB approvals. That could be deceptive because the data doesn’t differentiate between different types of investment. Nevertheless, “the average transaction from China is in the order of $800,000, which looks more like the price of a house/unit to me,” he said.

“We are essentially becoming part of a more globalised property market and it’s unlikely this will change,” said North. “Given what we know about the state of the market, and that locals are being priced out by other purchasers, including investors and overseas purchasers, we need to be wary of these current trends.”

With the Australian dollar’s depreciation against the yuan, Chinese investors’ purchasing power is increasing.

As far as North is concerned, there’s not much to be happy about with this new trend.

Continued investment will only push prices even higher. On the flip side, “if China caught an economic cold, it is possible we would see a reversal in property fortunes in Australia, so we are probably more leveraged to China through property than we know or realise.”

Hence North is calling for better data on overseas property investments to improve understanding of the implications of the Chinese Factor.
Categories
Banking,
Tags:
Foreign Investment Review Board, FIRB, Digital Finance Analytics, China, property, residential investment properties
Author:
Marion Williams, mwilliams@financialpublications.com.au
Article Posted:
January 20, 2014

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