How foreign buyers are cracking into the established property market
Residential property is virtually a national pastime for many Australians around the country.
In my native city of Sydney, residential property is arguably the number number one topic of conversation at BBQs, dinners out, family gatherings, and office water coolers.
So it is no surprise then that property conversations and public discourse over the past 12 months have focused on the topic of weakened housing affordability as a (possible) result of an increase in foreign investors in the market.
The challenge in discussing it properly, of course, is that up until recently whilst some initial figures have been published by the RBA and a couple of news outlets, there hadn’t been a thorough market analysis of affordability based on foreign influence.
However the federal government has listened to concerns and as a result it has commissioned an inquiry into foreign investment in Australian residential property.
Though the study is ongoing and results are yet to be released, the initial feedback was that foreign investment in Australian residential property has not been a major contributor to any ‘price bubbling’ occurring in capital city markets throughout the country.
Further perspectives outside the governmental inquiry however, have been coming to light in recent weeks and it has been interesting to hear the views put forward.
What is certain right now, however, is that residential property buying is strong in many major capital city markets around the country.
Influential factors such as limited land supply in high demand capital city suburbs (both inner, middle, and outer ring ones), current home owners blocking higher-density construction within city limits areas, and a low interest-rate environment are all stimulating a buying frenzy among locals and foreign investors alike.
These factors have collectively led to a major values growth ‘boom’ period in several markets.
The elephant in the room though is the notion of the foreign investor – in particular the Chinese investor – who are accounting for small but rapidly increasing percentages of all residential property buyers.
However, this is where the research may be coming up short. Like asking the question ‘which came first, the chicken or the egg?’, looking at sales data volumes over time may not account for the buyer's motivations for purchasing the properties they did; for the prices they did; during this time.
As a Sydney native who invests in this city (and is also currently looking for a home to purchase too), I’ve been privy to sentiments expressed “straight from the horses’ mouth” recently from both colleagues in the industry and other buyers ‘on the ground’.
When I am out at open home inspections most weekends, I’ve been speaking to other buyers with interest, hearing what the feedback is. It is certainly true that local buyers are ‘believe’ that foreign investors are having a significant impact, despite concrete official data confirming it.
So, the ‘real’ impact of more foreign buyers in the market could actually be a placebo-like effect. It is likely that the ‘scary thought’ of all the foreigners pushing locals out of the market is the actual catylst for locals pushing themselves out of the market! Or, the ‘FOMO’ (Fear of missing out) effect.
Regardless of your personal position or belief (however well or poorly researched it may be) on foreign investment jacking up prices for locals, the reality is that there are too many contributing factors to any property market’s growth (or indeed, lack of growth) at any one time to be sure.
One area where I do have a concern is in the ‘official’ data. One example here may be that foreign buyers (Significant Investor Visa or otherwise) are not permitted to purchase established dwellings – they are supposed to only be purchasing newly built stock.
However, most in the industry know that this is just not happening and is likely to go unchecked. Foreign buyers, especially from non-western cultures, are using one of the oldest group-buying strategies in the books, consortiums or shared-buying, to crack in to the established property market.
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Buying through a consortium means that a distant family member or family friend who is an Australian citizen (and thus not counted as a foreign buyer) may aggregate funds from several other family/friends together who themselves are not Australian residents or citizens.
This enables for the purchase of established houses on land (often without the need for a mortgage as the funds collected between the group/consortium are usually enough to buy the house outright).
As someone who is looking for a house (not a unit), on a decent size block of land in Sydney, I can confirm that I’ve seen this in practice during inspections.
How do you I know? I’ve been engaging in conversations with would-be buyers at inspections who have told me they're using this strategy themselves.
Whilst I do not take personal issue with the notion of foreign investors buying established houses (provided that the scale/extent of this permitted does not substantially prevent local buyers from entering the market), I do take issue with the official inquiry overlooking these purchases.
Consortium-style buying is often unofficial and unstructured, making them very hard to trace and keep a paper trail on. The Australian culture of group-buying (when it actually does happen – which is highly infrequent) is all about drawing up official legal contracts, split loans, and so on (at the point of property purchase – which of course helps to keep more official records on the group buying going on).
Foreign group-buyers tend to have just one person or couple (who have either residency or citizenship status) gather all the funds separately and externally, who then brings these to the solicitor as one lump sum in cash at the point of purchase.
This makes the true nature of the transaction highly difficult to trace locally and will likely not be reflected in any official findings. That said, China’s government has recently put rules in place to make it harder for Chinese nationals to bring funds overseas for investment purposes.
It will be interesting to see the findings of the inquiry as these become available. What will be more interesting though, will be to see if any governmental action is taken thereafter.
