Why Chinese property buyers are critical for Australia
The Australian economy relies heavily on foreign investment, with the majority of foreign investment approvals coming from China. In order for many of our new apartment developments to even get the go ahead, we rely on foreign purchases to meet the required pre-sales target.
Even though banks and regulators are making it harder for foreign investors to purchase property in Australia, Chinese buyers are currently not being put off. According to the latest annual report from the FIRB, the value of approvals for foreign investment in Australian real estate has increased by 75 per cent to $61 billion last financial year, of which Chinese investors made up approximately two thirds of these applications.
Even though the price of apartments in Australia are continuing to rise in terms of Australian dollars, making it more expensive for Australian buyers to purchase property, the lower Australian dollar actually makes it more affordable for Chinese buyers, where the median Australian apartment price in Chinese yuan has actually fallen since 2011.
However, although the lower Australian dollar supports foreign investment, “tighter lending conditions may see this ease” and “could see reduced demand from foreign buyers, although as yet there is little hard evidence of this”, says ANZ’s economists.
Increased Surcharges for Foreign Investors Recently, some of Australia’s states have introduced new taxes on foreign buyers. In Victoria, the government has increased stamp duty for foreign buyers from 3 per cent to 7 per cent, whilst in NSW, a 4 per cent stamp duty surcharge has been introduced alongside a 0.75 per cent land tax surcharge. Queensland, compared to all three states has the better end of the deal with the introduction of a 3 per cent stamp duty, which might make Queensland a much more appealing state for foreign buyers to purchase in. Having said that, other foreign buyers may still purchase in Victoria due to its capital city Melbourne recently being named the world’s most liveable city for the sixth year in a row by the Economist Intelligence Unit’s Survey for 2016.
However, slugging foreign buyers excessively with higher surcharges could backfire with foreign investors taking their money elsewhere. According to iBuyNew CEO Mark Mendel, “Foreigners buying property in Australia should be paying some tax, but the measures that have been announced by three state governments are over the top and could prove counter-productive for the domestic economy”.
A slowdown of property demand means a slowdown in prices With the continued tightening of lending standards for both foreign buyers and property developers, this might start to ease the housing demand, especially with the 4 per cent increase in stamp duty in Victoria. With a slowdown of property demand, this will also impact price growth with property prices having to also slow down to become more attractive.
According to ANZ, “From a peak of 12.8 per cent year-on-year in September 2015 and 8.1 per cent currently, we expect national house prices to rise by 6.4 per cent and 1.7 per cent in 2016 and 2017 respectively.”
With more banks and lenders tightening up their lending, there are worries that many foreign buyers may be at risk of being unable to settle on their property, come settlement, particularly within high-rise apartment blocks. However, buyers only need to worry about this risk if prices fall significantly from the time their deposit was paid until the settlement date.
According to UBS though, this settlement risk might be overstated as the share of Chinese borrowing for house purchases sits very low at around the 5 per cent mark.
A crackdown on money transfers However, tighter lending conditions is not the only risk on Chinese demand for Australian property. A crackdown on money transfers out of China could have a greater risk to the Chinese demand. There have been recent announcements from the Chinese government reporting that over 450 suspected operators of underground banks have been arrested this year in relation to almost $40 billion ($HK234 billion) in illegal overseas transfers.
Current regulations allow mainland Chinese individuals to change up to $65,400 in foreign currencies every year. However, with the fear of a falling yuan, and this limitation on investors, many individuals are seeking alternative methods such as underground money shops to get their money out of China and earn it through something else like Australian real estate.
Chinese foreign buyers leading the charge With the majority of foreign investment applications coming in for real estate (37,347 approvals for real estate between 2014-15 out of a total of 37,939 approvals), Chinese buyers are leading the charge, followed by the United States, of which both countries play an important role in our economy, especially the property market.
Victoria is also the most popular state for real estate investment from foreigners with 16,775 approvals for 2014-15, followed by NSW (12,349 approvals) and then QLD (5,023 approvals).
With tougher lending restrictions coming into force alongside increasing stamp duty surcharges, it will be interesting to see what impact this will have on foreign investment and whether this will put off foreign investors including Chinese property buyers from investing in real estate in Australia altogether.
To learn more about what effect Chinese property buyers has on the Australian property market and economy, or to find out more about how to purchase residential property as a foreign investor, get in touch with the iBuyNew team today, where one of our expert Property Consultants will be able to assist you further with your enquiries.
Call us today on 1300 123 463.
Published on 23rd of August 2016 by Marty Stanowich