Foreign buyers holding fire

IS Australia becoming less attractive to overseas property investors?

Industry players are hoping that the cooling off in foreign interest the past three months is simply a temporary dip.

IS Australia becoming less attractive to overseas property investors?

It turns out that what appeared to be a frenzy of activity just a few months ago has cooled sharply. National Australia Bank says foreign investment in the residential market fell from a high of 13.9 per cent in the first quarter of the year to a “two-year low” of 10.2 per cent in the three months to June 30.

The news must have sent a shudder through the offices of inner-city property developers who bank heavily on foreign buyers, ­especially for off-the-plan developments, which is all that foreign buyers are officially allowed to purchase. Indeed the prospect of foreign buyers stopping in their tracks might be as alarming to the investment community as the initial rush of activity has been to the first-home buyer constituency that has watched average house prices soar past average wage growth.

Any significant slowdown from foreign buyers will mean bad news for investors, particularly in Queensland where earlier in the year one in four new properties were being sold to foreign — predominantly Chinese — purchasers.

Similarly, Sydney and Melbourne’s “hottest” areas may be sobered if the data continue in this direction. Take the inner-north Melbourne suburb of Carlton, where foreign buyers appear to be turbocharging activity: there are more apartments set to be built in 2014 and 2015 than in the 10 years to December 2013.

Certainly there is no obvious reason put forward by NAB for the retraction in foreign buying activity. Indeed, logically you might have thought the lower ­levels of the dollar compared to a few years ago might have made our shores less attractive.

One reason investors — offshore or domestic — may be pausing in their push to snap up local property is that, NAB suggests, the property market will not repeat the powerful lift of the last year in the years ahead. The bank forecasts average property price gains nationally will be 4.25 per cent this calendar year and 4.3 per cent in 2015. That’s less than half the figure of 10.1 per cent recorded for the 12 months to December 2013.

If those forecasts turn out to be a reality then many people will be sincerely hoping the cooling off in foreign interest is simply a temporary dip, which unfortunately coincided with a major bank issuing a relatively downbeat forecast for the local market.

The hard fact is that foreign investors are, if not propping up prices in Australia, at least underpinning the premium residential prices, which are being achieved in a wider economy that is growing below trend.

A sceptic might quickly chime in at this stage and suggest there is no official statistical evidence that foreign investment is very important ... and this is true. Equally there is no evidence to the contrary, and the RBA has virtually conceded it just does not have enough data on this entire issue.

The well respected property research consultancy RP Data says more than 6 per cent of all property turnover is foreign — and we must assume the bulk of this is new property.

Now we also know that foreign buyers of new properties pay an average of $1.6 million, so it does not take a genius to work out that luxury and “higher end” new property in metropolitan locations is at the epicentre of this trend.

I expect this is a pause and nothing more in foreign buying. We often interpret the issue of foreign residential investment from a highly localised prospect (“The Chinese are buying Australian property as an insurance policy”) and no doubt that is a strong factor. But we are also in an era where the global movement of capital is so much easier than it was. Investors are operating in a borderless world that was unimaginable a few decades ago.

The pattern is most obvious in Europe where it is estimated almost 1 million British citizens hold residential property between France and Spain. As British investors move towards the cheaper and warmer real estate of southern Europe, international investors particularly from Russia have dominated the London property market.

Earlier this month, it was reported that average home prices in Britain were running at 10 times average income. That’s considerably higher than Australia where the comparable figure is about seven times income in the bigger cities. But a closer look at the British figures show that in regional cities such as Bristol or Leeds the income ratio was seven times, the national figure was heavily inflated by London where the price of an average house reach a shocking 14 times income.

Foreign investment in the Australian market is here to stay. It may wax and wane and just now there is a soft spot, but in the longer run with foreign buyers invariably spending well above $1m when they commit to this market, the gap between prices in attractive inner-city locations and everywhere else is going to widen.

We are seeing a trend that is duplicated around the world and the essence of the trend is that the best properties in the best cities ascend to a price level that disconnects with the wider market: On that basis foreign buyers may not — as many have feared — actively exclude most first-homebuyers across Australia. More likely though, they will exclude everyone except the richest and expert investors from inner-city property.

James Kirby is the managing editor of Eureka Report. Trial Eureka Report Free for 21 days. Register now at www.eurekareport.com.au