Foreign Investment: the good, the bad, the ugly

In mid December the ABS released its property price index which accounts for detached houses and units. It showed a 2.0% rise in home values nationally over the September quarter and a 10.7% gain over the year, a modest acceleration from the annual growth recorded in the year to June 2015.

Property value growth was powered by Sydney where prices grew by 3.1% over the quarter and by 19.9% over the year. Melbourne (+9.9% YoY) recorded strong growth, while Brisbane (+3.8% YoY), Adelaide (+3.5% YoY) and Canberra (+4.0% YoY) recorded moderate growth. Growth was negative in Perth (-3.3% YoY) and Darwin (-2.0% YoY).

It is notable that the ABS has also revised its estimated total national value of residential properties so that the value was $5.86 trillion in the September quarter, up from $5.72 trillion in the June quarter. The average price of Australia’s 9,572,000 residential properties is $612,200, up 10.1% from $555,600 recorded in the September quarter of 2014.

Amidst this rise has been a chorus of alarms from the mainstream media regarding the impact and scale of foreign investment into the Australian residential property market. This has focussed on the activity of Chinese purchasers, largely in the Sydney market and to a lesser extent Melbourne residential market. The net effect of the rise in property values is that young Australians have been largely priced out of the market – particularly in Sydney.  From this perspective it is useful to look at the key statistics regarding foreign investment.

According to annual Foreign Investment Review Board (FIRB) data, the value of foreign approvals in the real estate sector of Australia has increased in recent years from $41.5 billion in 2010-11 to $74.6 billion in 2013-14. Changes in reporting requirements prior to 2010-11 render any previous data on real estate foreign approvals incomparable with recent years. Annual foreign investment in both residential and commercial real estate have roughly doubled over this timeframe (see Chart 1).

An increase in the level of demand for Australian property is likely to lead to an increase in housing supply, as foreign buyers purchase both established and new dwellings. This increases the level of construction activity in Australia as well as building materials from local suppliers. Construction recently overtook manufacturing as the largest employer out of the typically ‘goods producing’ industries in Australia (see Chart 2).

While this is a dramatic increase it is important to appreciate that there are benefits that foreign investment in Australian brings.

Foreign investment serves the Australian national interests. The developmental history of Australia is based on capital inflows from the US and the UK. In more recent times inflows from Asia have attracted significant interest from the media. The overall value of foreign investment in Australia has stagnated in recent years (see Chart 1) and the increase in investment in real estate has helped overall figures from being in rapid decline. The value of foreign approvals in all sectors apart from property has declined from $135 billion in financial year 2010-11 to $93 billion in financial year 2013-14.

The latest official figures for financial year 2015 will not be available until the FIRB release their 2014-15 Annual Report in the first half of 2016. It is notable that a recent Credit Suisse research note estimates that Chinese demand for Australian residential property has recently slowed as Chinese investors tighten their purse strings. On the other hand, the rate of growth of the Chinese middle-class may continue to ensure that Chinese property investment continues to trend upwards in the long term.

In recent times a number of measures have been put in place to redress the concerns about the negative impacts of foreign investment in Australia’s property markets. For instance, the ATO has been manned with 50 enforcement officers and more than 1,044 matters have been investigated. And from the start of December 2015, stricter penalties came into effect that will not only financially penalise illegal buyers, but for the first time also the third parties that assist them, such as real estate agents, migration agents, lawyers, and accountants.

Australia needs foreign investment as we do not, and have never had the capital needed to develop the nation to its true potential. These are interesting times and the need to balance Australia’s growth funding needs and the need to maintain an accessible property market to its citizens, is unsurprisingly, a complex process.

Chart 1: Value of Foreign Approvals by Industry, 2010-11 to 2013-14

graph 1Source: Foreign Investment Review Board Annual Reports (2011 – 2015) ; MacroPlan (2015)

 

Chart 2: Labour Force of Selected Industries, Australia, 2000 – 2015

graph 2

Notes: seasonally adjusted
Source: ABS Cat. No. 6291.0 Table 4

 

Table 1: Value of Real Estate Foreign Approvals (as a Proportion of Value of Total Foreign Approvals)Table1

Source: Foreign Investment Review Board Annual Reports (2011 – 2015) ; MacroPlan (2015)

 

About MacroPlan:
MacroPlan’s experienced and qualified economists align their understanding of macro-economic forces with micro-economic variables such as geographic and industrial characteristics, demographics, labour market shifts, resource demand and commercial realities.  Contact Mark Courtney, General Manager – Queensland, today to discuss your property research requirements.

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