Why it's unlikely foreign demand for Australian housing has suddenly collapsed

Phil Walter/Getty ImagesApprovals does not mean investment.
  • The value of approvals for foreign investment in Australia’s housing market tumbled last financial year, according to Australia’s Foreign Investment Review Board (FIRB).
  • Many believe the collapse in approvals largely reflected the introduction of application fees, not a substantial drop in foreign demand.
  • A recent survey of Australian property experts suggests that rather than collapsing, foreign investment in Australia’s housing market is slowing modestly.

The value of approvals for foreign investment in Australia’s housing market tumbled last financial year, according to Australia’s Foreign Investment Review Board (FIRB).

It said a total of 13,198 residential real estate applications were approved, totalling $25.2 billion, well down on the 40,149 approvals, totalling $72.4 billion, granted in the 2015/16 financial year.

As seen in the chart below, it was a pronounced fall from the levels seen in prior years.

Australia Foreign Investment Review Board

However, did it lead to an actual fall in foreign investment?

Approvals, after all, are just that. Approvals. They’re not actual investment.

While factors such as capital controls in China and the introduction of state-based taxes on foreign investors likely contributed to the substantial decline in total approvals, the FIRB said “a significant factor contributing to the reduction… was the introduction of application fees from 1 December 2015″.

As opposed to prior years where individuals often made several applications when considering multiple properties, the introduction of an application fee likely made investors far more selective about the property they wish to buy.

“The introduction of fees resulted in investors only applying for properties they intend to purchase,” the FIRB said.

“This suggests that the resulting reduction in approvals may not imply a corresponding a reduction in actual investment in residential real estate.

“That is, the actual decline is likely to be lower than implied by the data.”

So the collapse in approvals may not have been mirrored in actual foreign investment.

Daniel Gradwell, Senior Economist at ANZ Bank, is one who thinks it didn’t.

“The data does not tell us how many approvals are converted into purchases of property,” he says.

“In order to assess movements in foreign buyer activity, we refer to the quarterly ANZ-Property Council of Australia (PCA) survey.”

Unlike the collapse in approvals, respondents in the latest survey indicated that sales to foreign investors declined at a substantially slower pace.

“The June 2018 survey suggests that, nationwide, 16% of property sales were to foreign buyers, down from 24% in September 2016,” Gradwell says.

“New South Wales and Victoria report similar declines over the same period.”

As the chart below shows, while reported sales to foreigners are slowing as a percentage of total property sales, it’s been nowhere to same degree suggested by the FIRB approvals data.

ANZ Bank

“When assessing these movements, we place greater weight on the results of the ANZ-PCA Survey than the raw FIRB data,” says Gradwell.

And in his opinion, it’s not all that surprising that sales to foreigners are slowing.

“The past couple of years have seen significant policy changes,” he says.

“[These] include tighter Chinese capital controls, the introduction and subsequent raising of stamp duty surcharges on foreign purchasers across New South Wales, Victoria, Queensland and Western Australia, a vacancy tax on foreign-owned properties that are unavailable for rental for at least six months a year and a 50% cap on foreign ownership in new developments.”

Gradwell says these policy changes are likely to prevent foreign buyer activity rebounding to levels seen in prior years.

However, he doubts it’s the end of foreign investment in Australia’s housing market as we know it.

“We think that foreign buyers still have a sizeable presence in the Australian property sector,” he says, adding they will remain attracted by Australia’s solid economy and strong levels of population growth.

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