Australian house price growth looks set to slow as foreign demand dries up

Photo: Getty Images

Foreign investment in Australia’s housing market has skyrocketed in recent years, hitting a record-high 40,000 approvals in the 2015/16 financial year, according to data released by Australia’s Foreign Investment Review Board (FIRB) earlier this year.

Coinciding with a period of strong house price growth, especially in Sydney and Melbourne, it’s understandable why some believe this rapid acceleration in foreign interest has been a major factor behind reduced housing affordability for those looking to enter the market.

To Paul Bloxham, chief Australia and New Zealand economist at HSBC, foreign demand has been a factor in helping to drive prices higher, although he admits that there is still considerable debate as to just how much impact it has had.

“One factor that has supported housing price growth in Australia has been foreign demand,” he says. “This has been particularly evident in demand for apartments in the major cities.”

Bloxham says that at 40,000 dwellings, foreign investment in 2015/16 accounted for around of 10% of total housing turnover.

While a relatively small proportion, it is significantly larger than that seen just a few years ago, near-quadrupling in the space of just four years.

Based on the latest FIRB figures, the vast majority of that investment came from Chinese buyers, jumping to $32 billion, leaving the United States at $8 billion in a distant second place.

So, based on that evidence, foreign investment has helped to underpin price growth in recent years.

However, just when it looked like a wall of foreign capital would only exacerbate this problem further, continuing the rapid growth seen in prior years, the influx of foreign interest slowed sharply in the 2016/17 financial year.

According to a recent speech from John Fraser, Australia’s Treasury Secretary, foreign approvals likely fell by as much as 60% to around 15,000, well down on the 40,000 level of 2015/16.

The chart below from HSBC shows the scale of the drop in foreign approvals last year, at least based off the figures mentioned by Fraser.

Source: HSBC

Bloxham calls this slowdown “quite significant”, suggesting that a variety of factors both from within Australia and abroad likely contributed to the decline.

“This could be due to a number of factors, including tighter capital controls in China, reduced access to Australian mortgages, or increased stamp duty imposed on foreign buyers by various State governments,” he says.

“New South Wales, Victoria, and Queensland have introduced additional stamp duty levies on foreign housing purchases, which they have just increased to 8%, 7%, and 3% of the property sale price, respectively.

“Weaker foreign demand could also reflect the recent fall in the Chinese yuan, which has made Australian housing more expensive in Chinese currency terms.”

This chart picks up on that last point perfectly, showing that recent weakness in the Chinese yuan, coupled with continued strong growth in Australian house prices, has made the cost of purchasing a property in Australia significantly more expensive for Chinese investors.

Source: HSBC

And, as Bloxham alluded to, tighter capital controls introduced in China earlier this year may have also been a factor.

China’s State Administration of Foreign Exchange (SAFE) introduced stricter foreign exchange rules on individuals in early January, stating that currency purchases should only be for genuine consumption needs, not investment purposes.

“The updated FX rules stress that people cannot purchase FX for overseas investment, including buying houses, securities or investment type insurance,” Wei Li, China and Asia economist at the Commonwealth Bank, said following the introduction of the rules earlier this year.

Like Bloxham, Sue Jong, chief of operations for Juwai.com, said that tighter capital controls were having an impact on Chinese demand.

“In Australia, we see that investment flows have decreased markedly from their peak, while remaining strong by historic standards,” she said earlier this week.
Capital controls, bank lending standards and foreign buyer taxes have combined to wind back the clock to 2015.”

Given that foreign investment has slowed over the past 12 months, at least based largely off anecdotal evidence, the question many are asking now, particularly after helping to fuel growth previously, is whether that will lead to a slowdown in house price growth?

Bloxham thinks it will, and not only because of slower foreign investment, but also tighter lending restrictions towards local investors and higher official interest rates.

“We still expect some cooling of these markets over the next 12-18 months,” he says.

“Our central case also sees the RBA beginning to lift its cash rate from early 2018, which would be expected to help cool the housing market.”

Here’s Bloxham’s forecasts for house and apartment prices in Australia’s mainland state capitals for this year and next.

Source: HSBC

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