Counting the cost of foreign investment in Australia

The inquiry into foreign real estate investment is both necessary and timely, but its terms of reference fail to address the questions that many Australians want answered.

Over the past few years, there has been rising concern about foreign investment in Australian real estate. Barely a week goes by without an anecdotal report from someone who lost out at auction to a ‘foreigner’ or a real estate agent who reported a sharp rise in interest from their Chinese clients.

In response to these public concerns, the House of Representatives has released its terms of reference for its inquiry into foreign investment in Australian residential real estate. But it appears that the inquiry will fail to dispel the fears that many Australians have about foreign investment.

The Committee has been asked to examine: the economic benefits of foreign investment in residential property; whether such foreign investment is directly increasing the supply of new housing and bringing benefits to the local building industry and its suppliers; how Australia’s foreign investment framework compares with international experience; and whether the administration of Australia’s foreign investment policy relating to residential property can be enhanced.

Currently, the Foreign Investment Review Board is charged with overseeing applications for foreign investment in Australian real estate. However, the system and the gathering of statistics is a bit of a farce.

Legally, foreign investors cannot buy established dwellings as investment properties. However, temporary residents can apply to purchase one established dwelling to live in while in Australia.

Temporary residents are legally required to sell that home when they leave Australia but it does not appear to be strongly enforced. Foreign investors can get around the FIRB rules simply by nominating a temporary or permanent resident to buy the property on their behalf. The rules seem to be written on the assumption that capital flows are not mobile.

I see three primary issues with the terms of reference as they currently stand.

First, the inquiry appears set to focus primarily on investors living overseas, but it is the behaviour of temporary residents that should be of greatest concern. It is quite simply too easy to get around the FIRB rules for temporary residents, encouraging foreign investors to increase their holdings of Australian property.

Second, they have not explicitly stated that they will address information collection or publication. Current information collection is slow and opaque, leaving the public uncertain surrounding the nature of foreign investment. Who is buying Australian property and to what extent? It is frustrating that anecdotal evidence is the best available evidence that we have on the state of foreign investment in Australia.

Third, there is no mention of the costs of foreign investment into Australian real estate. The inquiry is framed under the assumption of benefits but the public is primarily concerned about the cost. The reason this inquiry exists is because of concerns that Australians are being priced out of the market.

I have changed my opinion on foreign real estate investment a number of times over the past few years. Initially I was more than happy to believe the FIRB data, which suggested that there was no issue. But now I recognise that these data have severe limitations.

I suspect that foreign investment in Australian real estate is not as high as anecdotal evidence suggests nor as low as the FIRB reports. But like everyone else, I cannot base that on any tangible evidence.

As for the costs of foreign investment? According to Reuters, cash-strapped Chinese residents are selling their luxury homes in Hong Kong, with some knocking off up to a fifth off the price, as a liquidity crunch looms in China.

Chinese property investment in Hong Kong outstrips investment in Australia but that is the type of shock we leave ourselves open to by allowing practically unfettered investment into Australian property. Widespread foreign investment leads to a more volatile housing market --- greater gains during upswings but also greater losses during downturns.

The current boom in house prices is potentially one such example of this phenomenon. The upswing has almost entirely been driven by speculative activity, particularly in Sydney but also to some extent in Melbourne. A lot of this won’t be foreign investment, but a rising share has been because we simply do too little to track the purchases.

Australia’s economic prospects are already intrinsically tied to China’s fortunes. We survived the global financial crisis due to our close proximity to a strong Chinese economy but with their economy set to slow significantly over the next decade do we really want to enhance those ties? Do we really want our $5 trillion housing sector to move at the whims of foreign interests?

The inquiry into foreign investment into Australian real estate is both necessary and timely. But are they asking the questions that Australians want answered? That is far from clear.

For the inquiry to address the real issues, it must focus on the behaviour of temporary residents, improve the quality of data collection and information, and analyse the potential macroeconomic costs and implications of widespread foreign investment. The terms of reference leave me far from confident that this will be the case and we may instead receive an inquiry that fails to address the public’s concerns.