China and the Real Estate Debate
Monday, May 12, 2014
Are foreign buyers in fact making local real estate more expensive?
Let's drill down into that question. Some people are concerned that Chinese real estate investment is pumping up prices in the market and squeezing out local home buyers. It’s time for an intelligent and informed look at these concerns and the impact of the growth of investments from China in Australian real estate. Is it getting high enough to be pricing Australians out of their own housing market? How much is it really? Is there a problem?
The issue has been in the news a lot lately with the release of a report by Credit Suisse in early March and with the announcement of a Parliamentary Inquiry into foreign ownership of residential real estate assets.
The Credit Suisse report certainly unearths some compelling stats on residential Chinese real estate investment. The headliners are a) “The Chinese are currently purchasing more than $5bn of Australian residential property per annum. This accounts for 12% of new housing supply. They are concentrating their buying and acquiring 18% of new supply in Sydney and 14% in Melbourne” and b) the aging Chinese demographic can “support a further $44bn of Australian residential property purchases over the next seven years. They purchased $24bn over the past seven.”
Commentators like Fairfax's Paul Sheehan have picked up on the data and have voiced some strong opinions. Sheehan argues that the world's most unaffordable cities in real estate terms – Vancouver, Hong Kong, Sydney and Melbourne - are linked by the common thread of their popularity with Chinese investors.
“If cashed-up Chinese buyers, and superannuation funds looking for investments, are both driving the market, this becomes a cultural issue if Australia wants to maintain the tradition of having one of the world's highest rates of home ownership.” All this, he says, “is not culturally healthy.”
OK, big numbers, cultural impacts. Sounds ominous. But consider a few more details. First, most foreign investors can only buy new or off the plan residential properties in multiples, not existing homes. That is, building a foreign investment portfolio can generally only be done on brand new or unbuilt properties (temporary residents can only buy one home while they are here).
So, the argument goes, all foreign investors are helping to pull the construction industry, sinking money in to properties that may not otherwise have been built and stimulating the economy too. In fact, this input may be making housing cheaper as it is increasing supply.
That fact is underlined in a trend emphasised by Crikey's Bernard Keane. That is, that the size of Chinese investment is large, but it also includes investment in commercial real estate to a much higher proportion than residential real estate. Much of this infrastructure would not get built at all without the foreign sector.
That goes for residential real estate as well. Writes Keane, “The best way to improve housing affordability... is to create incentives for investment in building new housing stock. And oddly enough, at the moment it’s foreign investors who are doing that, not the rest of us.”
The second point is that while Chinese investment looks big, in comparison to overall real estate investment, it's less impressive. According to data from the Foreign Investor Review Board, overall foreign investment in real estate approvals were valued at just under $52 billion in the last financial year, (actually considerably down on the previous year).
Keane highlights the 500-kilo gorilla in the room; “Read many stories about white people driving up Sydney real estate prices? Of course not. Hard to get a good anecdote about white people showing up to an auction and bidding successfully for a property. “Chinese” buyers, even if their families have lived in Australia for a century, are easier to spot and complain about.”
What we can say is that foreign investment in real estate is on the up, and that Chinese investment within that is clearly growing too. This is impacting in various ways on the market and it is unclear what that impact is at the moment.
We can also say that a range of other factors, such as land releases, interest rates, access to loans, tax regimes and building regulations - and more – also play their part.
One point to be made here too is that the Foreign Investment Review Board’s data on foreign ownership of real estate assets has been criticised by just about everyone for being too vague. Part of the reason everyone is struggling to work out what's going on is the fact the FIRB hasn't really placed any real data priority on this area.
Fairfax reporter Chris Vedelago wrote about his difficulty in finding basic information on foreign ownership of local real estate as far back as 2011. He argued, “The kind of information that should appear in the Foreign Investment Review Board’s annual report or be available upon request...for some reason necessitates a FOI (Freedom of Information) filing to even attempt to get access.”
A little over a year later he was still being frustrated.
The Australian Financial Review, in hailing 2014 “The Year of the Chinese Developer” also took aim at the FIRB data, “Even the experts find the FIRB annual report, released last week for 2012-13, tardy, lacking in meaningful detail and hard to reconcile with their own experience.”
So, there's plenty of reasons why the federal government's inquiry into the situation should be welcomed; its a hot topic in need of good data and it and needs to be looked into. There's a national discussion to be had here. But the parameters need to be set by facts not furphies. For those with a stake in the market, it will be worth watching this space very closely.