Foreing Investment: How is it effecting the real estate prices and the property management sector

Machine generated alternative text: On Friday 30 May, REIA CEO Amanda Lynch and Policy Manager Jock Kreitals appeared before the House of Representatives Standing Committee on Economics’ Inquiry into Foreign Investment in Residential Real Estate. The Chair of the Committee is Liberal MP Kelly O’Dwyer.

Ms Lynch made three main points on behalf of REIA and its members:

  • We believe that foreign investment is beneficial and adds to the supply of housing
  • We believe that reliable and timely data is required
  • We believe that a review of the compliance and monitoring activities and its effectiveness  is needed.

Ms Lynch said: “The focus on Chinese investment is a beat up and it is important that we have a reality check. Chinese investment in all real estate is 11.4% of the total, closely followed by the US at 9.5% and Canada at 8.5%.

“There is insufficient evidence to come to a definitive conclusion on the level of competition  between foreign buyers and first home buyers in particular markets. On the aggregate data available we see that the mean price that foreign investors pay are at a level higher than the average first home buyers would pay.

First home buyers were at a historic low 12.3% in November last year and now make 12.6% of the owner-occupier market compared to the long-run average of 19.8%. This is due to many factors such as the affordability of housing, changes by State and Territory Governments to the eligibility criteria for the first home owner grant, taxes, and access to finance. Australian first home buyers have an 80% preference in their buying habits for established real estate rather than new apartments bought by foreign investors.

Foreign investors who are not temporary residents can not buy established houses. The preference for foreign investors is at the higher level of the market with a $1 million average for established real estate for temporary residents and $647K for individual purchases of new dwellings, which compares with the current median price of $606,511 for houses and $483,320 for units, and is way beyond the reach of an aspiring first home buyer.

Australia has a regulated approach to foreign investment, compared with the US which has an open door approach. We believe that the current system works well and contend that with an undersupply of housing nationally at around 200,000 -300,000, foreign investors are contributing to the supply. The undersupply is reflected in a tight rental market. An industry benchmark vacancy rate is considered to be a value of 3.0% with the vacancy rates lower than 3.0% indicating strong demand for rental accommodation.

During the first quarter of 2014, the weighted average vacancy rate for eight capitals was 2.4% with Sydney having the lowest vacancy rate of 1.4%. The figures for Melbourne and Brisbane were 2.8% and 2.3% respectively.

Foreign investment adds to the supply of rental property vacancy rates and rents would be higher without foreign investment. Without foreign investment, many building projects would simply not be viable. With the winding down of the mining construction phase, the spotlight is on housing as a sector that will contribute significantly to Australia’s economic transition, assisted by other sectors of the economy such as agriculture, education services and technological innovation. Indeed, housing approvals show this is already happening.

Secondly, the Foreign Investment Review Board Annual Reports are the only source of data on foreign investment in Australian residential real estate. The reports are available nearly nine months after the close of the financial year and the detail of the data made publicly is limited. The REIA believes that the publicly available data could be enhanced.

Finally, it is not apparent how effective the expanded monitoring and compliance activities introduced in 2010 have been. There have been no prosecutions since 2010 under the upgraded scheme whereas prior to this there were on average one or two a year. Our argument is if penalties are there, they should be enforced. Which is why we advocate that a review be undertaken of the compliance and monitoring activities. We also advocate penalties in line with the value of the property as being more appropriate. The current maximum fine of $85,000 is inadequate for multi-million dollar investments.”