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Foreign buyers not to blame for house prices

The presence of foreign buyers in Australia’s property market has been rising strongly in recent years – but they are not the main driver of higher prices, according to new ANZ Research. Foreign buyers still represent a small share of the total market and, having not been the main cause of the rapid price growth, are unlikely to be the cause of any sharp price correction.

The research shows foreign investors purchased between 35,000 and 60,000 dwellings in Australia in 2015-16, with foreign buyers making up only a small share of total housing turnover for the year, between 7 per cent and 13 per cent. 

" The estimated ownership is significant… but not large enough to raise concerns about a foreign exodus from the Australian housing market."

The impact is more significant as a share of newly-constructed dwellings at between 15 per cent and 25 per cent.

Using Foreign Investment Review Board data we estimate foreigners own between 2.5 per cent and 4 per cent of Australia’s housing stock, plus anything purchased before 1995-96 when the data became available. The 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 foreign demand has been an important contributor to Australia’s recent construction boom.

But the relatively lower share of total market activity suggests 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 ownership is significant - especially considering the current rate of growth is much stronger than in the past - but not large enough to raise concerns about a foreign exodus from the Australian housing market.

Belief

Foreigners require FIRB approval to purchase new dwellings or vacant residential land. 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.  

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 this does not give us the number of approvals which were actioned.

FIRB data tell us in 2015-16, 40,100 property purchases by foreign buyers were approved, valued at $A72.4 billion. 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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Impact

 

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 a fee for approvals was introduced in December 2015.

This means 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 $A72.4 billion of sales to foreign purchasers in 2015-16. To convert this into the number of transactions, we lean on recent estimates from the Reserve Bank, which notes foreign buyers are purchasing around 10 per cent to 15 per cent of all new housing and around 25 per cent of new apartments.

To line up our analysis with the RBA, we assume 30 per cent to 50 per cent of approvals result in a property purchase.

If foreigners are purchasing around 25 per cent of new apartments, this suggests around 80 per cent of foreign purchases are apartments and the remaining 20 per cent are houses. By applying this ratio to CoreLogic data on house and apartment/unit prices, we derive an average price of foreign purchases of $A620,000 for 2015-16.

These conversion rates imply foreign purchasers bought between $A22 billion and $A35 billion in Australian property in 2015-16. At the median price described above, this translates to the purchase of 35,000 to 60,000 dwellings nationwide.

That number can be broken down further to assess how many of these purchases were for new dwellings. The estimate represents 15 per cent to 25 per cent of Australia’s new builds that year.

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 foreign purchases of those dwellings accounted for only 7 per cent to 13 per cent of the market.

Over the past 21 years we find foreign buyers have purchased an estimated 250,000 to 450,000 dwellings in Australia. As of the 2016 Census, Australia’s total stock of housing was 9.8 million dwellings. This means foreigners could own approximately 2.5 per cent to 4 per cent of Australia’s housing stock.

Imperfect

This estimate is imperfect. It does not include properties bought before 1995-96, nor the subsequent sale of any properties previously held by foreigners.

It is also sensitive to the assumed conversion rate from approvals to purchases, and the impact the mix of houses and apartments would have on the average purchase price.

Assuming our estimate of purchases to approvals is near the mark it yields a useful frame of reference when assessing the impact of foreign buyers of the Australian market.

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 per cent to 13 per cent of total sales each year is not as significant as the share of new construction. The impact on overall prices is likely to be less.

Daniel Gradwell is a senior economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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