Overseas investors: friend or foe to Australia's property market?

Foreign investors have been an easy target for politicians of late. It makes sense – they don’t get a vote and they don’t have a collective voice to defend themselves. 

When it is a topic as emotionally charged as housing, it becomes even more of a hot button issue. For those struggling to enter the housing market, it’s an easy one to grasp - if you’re bidding on your dream house at auction, no one like the idea of losing out to a ‘wealthy’ property investor, let alone one from overseas.

But the reality is, the negative influence of foreign investors on our affordable property market has been blown out of proportion and the measures that have been put in place to limit off-shore investment may actually be causing broader harm to our property sector and local economy.

It’s gotten a lot tougher for foreign investors these days to invest in residential property. The scenario of a foreign investor swooping in and beating a potential owner-occupier at auction is only possible if it is new housing stock. With very few exceptions, foreign investors are prohibited from buying established homes and therefore are not competing our first home buyers out the market. It’s most likely that they are competing with Australian property investors, who have continued to grow in number in recent years.

First, let’s consider the barriers being put in front of foreign investors on the Australian side. Even when foreign investors seek to purchase new stock there is a minimum $5,000 fee from the Foreign Investment Review Board, a hefty additional amount of stamp duty in many states and now vacancy penalties to contend with depending on their intended use of the property. That alone can be enough to tip a good investment opportunity into a questionable one.

The eastern seaboard states have each introduced (and since lifted) a stamp duty surcharge on foreign acquirers of residential property. Victoria was the first state to introduce this surcharge at 3% on 1 July 2015 and has since lifted it to 7%. New South Wales and Queensland both introduced surcharges on 1 July 2016 and have announced increases in subsequent budgets to 8% and 7% respectively.  Both South Australia and Western Australia were late in jumping on the bandwagon, but introduced the surcharge at the higher rates.

For those working in the property sector, the big concern is the FIRB approval limitations that now exist for offshore customers to invest in new residential projects.

If we then combine this with the restrictions being placed on capital by the investors home country – namely China. Chinese investors have been significant players in our local market for years as the restrictions imposed by the Chinese Government prior to 2017 were generally able to be worked around. However, more recent crackdowns on currency controls and investment restrictions out of China have certainly impacted the ability to place their capital in Australian property. Determined investors will find a way to get their money out, but it’s significantly more challenging than it was at the start of this property cycle.

One of the key advantages that foreign investors sought in our market is stability and minimal sovereign risk.  However, Government actions in recent years and the number of barriers that have now been placed in the way of foreign investment has turned this on its head -  leading investors to look elsewhere to place their capital.   

What that means for developers looking for funding is that the equity threshold for getting a project over the line is much higher than it used to be. Many banks have reduced the number of foreign presales that can count towards eligibility for loans or removed them from the equation altogether.

Add the regulator-led tightening of lending across the board and many projects are facing an uphill battle when it comes to traditional funding options.