We are often asked about the rules around foreign investment and the impact that such investors have on the Australian housing market. While concrete data are hard to come by, we are able to combine existing data with informed assumptions to reveal some useful insights.
We build on recent work by Australia’s Reserve Bank (RBA) to estimate that foreign investors purchased between 35,000 and 60,000 dwellings in Australia in 2015-16. Foreign buyers seem to make up only a small share of total housing turnover for the year (7–13%), although the impact is more significant as a share of newly- constructed dwellings (15–25%) and in some states.
Using Foreign Investment Review Board (FIRB) data back to 1995-96, we estimate that foreigners own between 2.5% and 4% of Australia’s housing stock, plus anything purchased before that year. The size of this range reflects uncertainty about the extent to which foreign buyer approvals convert to actual purchases.
The sizeable foreign-buyer share of newly-constructed housing implies that foreign demand has been an important contributor to Australia’s recent construction boom. But the relatively lower share of total market activity suggests that foreign buyers have not been the primary driver of the price growth in recent years. That is not to say foreign buying has had no impact on prices.
The estimated 2.5–4% foreign ownership of Australia’s housing stock is significant, especially considering that the current rate of growth is much stronger than in the past. It is also not large enough for us to be particularly concerned about a foreign exodus from the Australian housing market.
We note that Revenue New South Wales has several times this year released data on the number and value of foreign purchasers that have been subjected to stamp duty surcharges. It would be helpful if other state governments released their suite of data on foreign buyers, which would assist in more concrete analysis around the impact of foreigners on Australia’s housing market.
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WHAT DO WE KNOW?
In terms of the FIRB process, the key details are:
- Foreigners require FIRB approval to purchase new dwellings or vacant residential land. The vast majority of applications for new dwellings are approved without conditions. Applications to purchase vacant land are subject to construction being completed within four years, to prevent land banking.
- Contrary to relatively popular belief, foreigners can obtain approval to purchase existing dwellings. These applications are generally only approved subject to the purchaser increasing the stock of housing. For example, a knock down and rebuild where one existing dwelling is replaced with two or more townhouses or units.
- Temporary residents (such as students or people on working visas) are also required to obtain FIRB approval to purchase an existing dwelling. These purchasers are not permitted to lease out the property and are required to sell the property once they leave Australia.
Because all foreign buyers require this approval to purchase Australian property, the FIRB have data on the value and number of approvals granted. Note however, that this does not give us the number of approvals that were actioned.
The FIRB data tell us that in 2015-16, 40,100 property purchases by foreign buyers were approved, valued at AUD72.4bn. Each FIRB approval can be for more than one property, so the value figure is particularly important. Foreign purchases have risen sharply in recent years, led by Chinese purchasers; with the value of approvals granted in 2015-16 three and a half times greater than just five years ago.
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QUANTIFYING THE IMPACT
The FIRB data tells us about approvals, not actual purchases. So, to calculate actual foreign buying, we need to make some assumptions about the rate at which approvals translate into purchases.
In doing so we need to be mindful that a fee for approvals was introduced in December 2015. This means that for half of 2015-16 and in all subsequent years, the ‘conversion rate’ from approvals to purchases is likely to be much higher, because potential buyers are unlikely to incur the application fee unless they are highly committed.
The FIRB approved $72.4bn of sales to foreign purchasers in 2015-16. To convert this into the number of transactions, we lean on recent estimates from the RBA, which noted that foreign buyers are purchasing around 10-15% of all new housing and around 25% of new apartments.
1. To line up our analysis with the RBA, we assume that 30–50% of approvals result in a property purchase.
2. If foreigners are purchasing around 25% of new apartments, this suggests around 80% of foreign purchases are apartments and the remaining 20% are houses. By applying this ratio to CoreLogic data on house and apartment/unit prices, we derive an average price of foreign purchases of $620,000 nationwide for 2015-16.
These conversion rates imply that foreign purchasers bought AUD22–35bn of Australian property in 2015-16. At the median price described above, this translates to the purchase of 35,000–60,000 dwellings nationwide.
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That number can be broken down further to assess how many of these purchases were for new dwellings. We estimate that foreign buyers purchased 30,000–50,000 new dwellings in 2015-16, representing 15–25% of Australia’s new builds that year. In flow terms, therefore, the impact of foreign buyers on the new housing segment could be sizeable.
On our estimates, most of this foreign activity in new housing in 2015-16 seems to have been in Victoria. We estimate that foreigners purchased 13,000–20,000 new dwellings in Victoria, representing 25–35% of total new builds in the year. The market share seems to be higher in Queensland (25–45% of new dwellings) and lower in New South Wales (15–20%).
However, the impact of foreign buyers is less significant when we compare the level of purchasing against Australia’s total housing turnover.
In 2015-16, 465,000 dwellings were sold, meaning that foreign purchases of 35,000–60,000 dwellings accounted for only 7–13% of the market. Again, foreigners seem to be most active in Victoria (10–20% of sales) and Queensland (10– 15%), followed by New South Wales (5–10%).
The analysis can be extended back to the commencement of the FIRB data in 1995-96. Over the past 21 years (again assuming that 30–50% of FIRB approvals translate into purchases, and that foreigners have been buying 80% units and 20% houses), we find that foreign buyers have purchased an estimated 250,000–450,000 dwellings in Australia. As of the 2016 Census, Australia’s total stock of housing was 9.8 million dwellings. This means that foreigners could own approximately 2.5–4% of Australia’s housing stock.
This estimate is imperfect. It does not include properties bought before 1995-96, nor the subsequent sale of any properties previously held by foreign owners. Further, it is sensitive to the assumed 30-50% conversion rate from approvals to purchases, and the impact that the mix of houses and apartments would have on the average purchase price.
Assuming our estimate of 30-50% of purchases to approvals is near the mark, this yields a useful frame of reference when assessing the impact of foreign buyers of the Australian market. At 15–25% of new builds in 2015-16, foreign demand is clearly one of the drivers of the strength in our dwelling investment profile. If this demand were to dry up suddenly, Australia’s construction pipeline would likely be notably weaker than currently expected.
The impact of foreign demand on prices is less clear. The purchase of 7–13% of total sales each year is not as significant as the share of new construction. So the impact on overall prices is likely to be less than the impact on construction.
Another way of looking at this is in terms of the stock of housing, rather than the flow. As described above, we estimate that foreign owners hold 2.5–4% of Australia’s housing stock. Around 5% of Australia’s housing stock is bought and sold each year. This means that only a large shock, causing a high share of foreign owners to sell their Australian property, would be significant enough to drive sale prices lower.
WHAT OTHER ANALYSIS IS THERE?
The RBA recently noted that, “nationally, purchases by foreign buyers are equivalent to around 10–15 per cent of new construction, or about 5 per cent of total housing sales.” The RBA also suggests that the foreign buyer share of new construction purchases is higher for apartments, “but it is still only perhaps around one quarter of newly built apartments”. As described above, we have used these figures as a starting point for our analysis.
Revenue New South Wales has released details of purchases that incurred the foreign buyer stamp duty surcharge in 2016-17. The data show that just under 4,000 purchases incurred the stamp duty, generating AUD185m revenue for the state.
The first few months of data appear incomplete, so ignoring these and annualising the data suggest that around 5,000 properties are bought by foreign investors each year, at present. This is 4% of total turnover and 10% of new properties if no existing properties were purchased, which is consistent with our estimate of foreign buyer activity in New South Wales. But because stamp duty has only recently been introduced in New South Wales, we do not have a longer time series to investigate.
Similar estimates are also found in the ANZ-Property Council survey. Survey respondents from the residential property sector (who are primarily developers and therefore focussed on newly-constructed dwellings) reported in the December quarter that 18% of property sales nationwide were to foreign buyers. New South Wales and Victoria topped the list at 22%, followed by Queensland with 15%.
While the nationwide number in this survey is consistent with our estimates above, the estimate of foreign purchases of new builds in Queensland (at 15%) is much lower than our estimates (of 25–45%).
In contrast, the estimates for New South Wales and Victoria are broadly in line. As such, we think the portion of foreign purchases in Queensland is likely to sit at the lower end of our estimated range.
Treasury have also released work into the impact of foreign investment on dwelling prices. They found that foreign demand is responsible for only a small share of the strong property price growth between July 2010 and March 2015. Their modelling found that foreign buyers have pushed dwelling prices AUD80–122 higher per quarter, which is “very small when compared with the average quarterly increase in Sydney and Melbourne property prices over the period studied of around $12,800.”
Keeping in mind the data imperfections and subsequent variety of estimates, the research tends to suggest that while the presence of foreign buyers has been rising strongly in recent years, they are likely to still be a small share of our total housing market.
It is our view that foreign buyers have supported dwelling investment through the current cycle, but have not been the main cause of the rapid price growth and are unlikely to be the cause of a sharp price correction.
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Source From: www.propertyobserver.com.au