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Foreign buyers blow out the housing bubble
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The causes of Australia’s ever-inflating housing bubble are many — artificially low interest rates, government stimulus and a real-estate industry devoted to an ever-increasing house price to name but a few. However, a less well-publicised factor may also be at play, that is the influence of foreign buyers. In December 2008, the federal government, whose primary goal appears to be maintaining property prices at unsustainably high levels, introduced legislation relaxing rules for foreign buyers of Australian property. The rules were especially helpful for property developers, who coincidentally happen to be large donors to the Labor party. Previously, developers were able to offload no more than half of the new dwellings in a development to overseas buyers. This would mean that companies such as Central Equity, Becton or Mirvac would develop extensive overseas distribution networks and sales teams to offload half of their over-priced, off-the-plan apartments to gullible and foolish overseas buyers (usually based in Asia, but also in the United Kingdom and US). For the remainder, the developers would have to convince Australians to part with their hard-earned to purchase properties off the plan in the vain hope of riches materialising before settlement (the new laws now allow developers to sell all properties in a development off-shore). Under the new laws, developers could sell 100% of new developments off-the-plan to overseas buyers who tend to pay a premium for Australian real estate, possibly because they are uninformed, but also, because Australia involves far less “sovereign risk” than many overseas jurisdictions. Another critical change introduced by the federal government was a relaxation on the acquisition of established properties. Under previous legislation, holders of student visas were only able to buy a property that cost less than $300,000, since late last year that limit was removed. Further, foreign-owned corporations are now permitted to purchase properties for Australian staff while temporary visa holders also face fewer restrictions. The effect of the law changes should not be underestimated. The Sunday Age this week reported that Melbourne agent JP Dixon (based in luxurious Brighton in Melbourne’s east) noted that more than 40% of sales were made to Chinese interests. An agent told the paper that “[overseas investors] buy them to land bank, not to rent the, out. The houses just sit vacant because they are after capital growth.” Such is the federal government’s fear that a residential property slump will be a negative at the polls, they have introduced a policy that exacerbates Australia’s housing shortage and prolongs an asset bubble. According to FIRB data released last month, foreign investment in Australian real estate shot up by more than 30% this year to $20.4 billion. The influx of (largely Chinese) funds in the property sector is reminiscent of Australia’s last property bubble of the late 1980s. Then, it was Japanese money that flooded Australian (and moreover, American) markets. Japanese investors would lose billions as the property the cost of debt exploded and property markets across the Western world (and in Japan) slumped. Famously, Japanese companies Nippon Shinpan and Mitsui paid more than $300 million to acquire half of the Sheraton Mirage at Port Douglas from Christopher Skase (it would acquire the entire property soon after). Almost 20 years later, the luxury resort would be sold for a third of its purchase price to the since collapsed MFS. The arrival of additional foreign monies into the Australian property sector is no doubt a boon for vendors, now able to offload property holdings to naïve purchasers, willing to pay far more than the intrinsic value of the asset than its actual worth. The policy change is perhaps less beneficial to young Australian first-home buyers, already struggling with poorly devised government stimulus such as the first-home-owner’s grant to enter the ever-increasing expensive property roundabout. |
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40 Comments
A pay-as-you-go taxation on real estate would steady the market from surges in foreign funds. For that matter, it would be a way to get taxes out of all fly-by-night investors.
That applies to shares in some countries I believe — you pay capital capital gains tax based on market price no matter whether you hold or sell.
Adam, did you make any submissions to the Henry review? Must be on the radar at least after Glen Stevens’ statement about prices and housing stock.
That stat of 20.4 billion in residential investment quoted. Isn’t that the figure released from the FIRB Annual report 2007-2008? Surely that pre-dates the new laws introduced in Dec 2008 and fully implemented from early 2009 ? Or are there other figures I’m not aware of.
There is also a very big difference between foreign investment in commercial property (like the Japanese example quoted) vs foreign investment in residential property (which I believe can include temporay residents buying property to live in)
Its really a third world situation in which the local moneyed classes decide they have more common interest with their kin overseas than the local population. It would be a political issue, but this is effectively neutralised by the fact that Australians who own homes are really happy for them to remain highly prices. Understandable, of course, but not sustainable for more than one generation.
There is one thing, and one thing only, that would see the Rudd government thrown out at the next election and that is a big fall in house prices. Rudd knows this and that is the real reason why the First Home Buyers grants were increased recently. The governemnt doesn’t give a toss about young couples buying homes, they knew that the grants would increase prices and put a floor under the homes owned outright by baby boomers and others. The government will take any action to increase demand for housing just to keep prices up. Same goes for their feigned interest in public housing - they don’t really want to see lots of public housing built as that would reduce demand for private investment houses which are rented and subsidised by the Centrelink rent assistance subsidy. Alex
There is one very large group that would cheer at a sharp dip in housing prices - tenants.
Tenants have paid taxes that have been used to create a landed gentry from among an egalitarian society. I, for one must work until I drop because I will never be able to afford these blown-out rents on a pension. Around me, my landed contemporaries retire early, cashing in their windfall profits. I pray that their spending will not raise other standards beyond my reach.
Are you asking for my vote as well?
Problem is there’s a bit more to it than just barriers to home buyers.
See http://www.themovechannel.com/news/fff11063-1106/ abstract of an article from British economic think tank, not long before the collapse in British home prices.
The excessive boom in house prices was described as “one of the major adverse developments affecting the UK economy over the past 20 years”. It had a similar effect to rising government debt because it transferred a financial burden to future generations. In the UK that burden was “equivalent to a deficit on the government current account of almost 4% of GDP, or £50bn a year”.
Australian voters seem to have no trouble believing money can be made out of thin air, but once the reality is put to them this way, they might take a different view. Even Daily Telegraph readers understand what intergenerational debt is.
Joe Average also understands what rock-concert ticket scalping is. Property speculation that exploits rising scarcity value, rather than intrinsic earning value, is a form of scalping. But ticket scalping has a short tail with a finite expiry time. Property scalping has a long tail, exploiting current homeowners for the rest of their working lives, and continuing to suck wealth from children not even born yet.
I just hope that when the generation of Baby-Boomer house-owners all start simultaneously retiring overseas or to retirement villages, there will be some nice bargains out there. It will make up for the gift of big HECS debts and house prices, and the future taxes for carbon and Baby-Boomer health care.
Thanks for the internet though - brings the lulz. Also superannuation is pretty good.
It’s good to see Australia becoming a share-cropping society for it’s working and middle classes isn’t it.
In the spirit of schadenfreude I would add, however, that anyone holding a mortgage when prices do crash is in for some real financial pain. The renters will inherit, eventually, if they can manage to save in the meantime. Of course it could be that the Australian property market is unique among the asset markets of the world - but I wouldn’t want to take a 30 year punt on that.
altakoi i know your comment is tongue in cheek about “australia property mkt unique”.
thats what the japanese believed of course in their 80s property boom ( and subsequent bust ).
no one seems to remember the late 80s/early 90s property correction here. they generally occur one or two years after a share market/employment correction ( already happened/happening ).
I don’t think I’ve ever come across such a bunch of whingers. What a circle jerk this is.
Owning a home has never been easy, not now, not 30 years ago. My parents bought their first home for $32,000 in 1978, and my Dad was on around $4,500 at the bank. 7 - 8 x earnings. Nothing is different nowadays.
If you want to buy a house, you have to sacrifice. If you don’t earn enough, educate yourself, do more study or start a part time business. Make yourself worth more to society. I part time tutor as well as work full time because it’s something I thoroughly enjoy and it is rewarding.
This constant, sitting back and whining about the price of houses is such a waste of time and energy. Yes they are expensive. They always have been though. If you want to live in a nice area with developed gardens and close(r) to the city then you will pay for it, that’s life.
Shelter and safety is a human right. Owning the shelter is a privelige, one people have to work hard for, especially if you want the 5 bedroom, 2 storey, 3 bathroom, double garage with home cinema mansion as your first home.
As for the foreign investment angle, how wider scope are we going press on this continual ‘house prices are overvalued woee is me I’ll never get a home’ angle? Any foreign investor who wanted to buy a typical residential home in Australia for investment would be a fool, as the vultures can look at the US homes going cheap by the dozen.
(((This constant, sitting back and whining about the price of houses is such a waste of time and energy. ))))
Adam, you are barking up the wrong tree.
There are still some people left in the world who seek to make it a better place to live…and accepting a system in which average people are forced to place their neck in a financial noose for the rest of their lives just to put a roof over their head is insidious…that’s the root of this discussion. The context of house prices is just a sympton of the bigger picture.
If you are happy to see future generations saddled with debt they will never afford…then so be it, but others are n’t.
Adam, fair call re: the whinging
Although my understanding was that house prices 30 years ago were on average 3 x earnings, compared to 8x today.
My solution was to invest in the Australian share market (long term of course). You can pick your entry level. And you can say you’re supporting — and hopefully profiting from — the ingenuity and hard work of successful Aussie companies/workers/people, the windfall gains of the resources boom, and the current strength of the big 4 banks. As opposed to bricks and home theatres.
I’d still probably prefer a house though
@Gary - people are not forced to put ‘their neck in a financial noose’, home ownership is a choice. If you don’t want to buy, don’t buy, rent, and invest the difference - but don’t whinge about it.
I’d like a lot of things in this world to change. I’m with you on this, there are a lot of messed up things in this world these days - illegal wars which slaughter innocents, pollution wrecking our planet, racism and intolerance to name a few - but sitting back and complaining about them isn’t going to change anything.
@pwnerous - Don’t get me wrong I’m not saying houses are the greatest investment on earth - the share market is also a very good investment vehicle, and actually looks better than property at the moment in my opinion. I’m not advocating property as an investment, nor am I saying everything else is terrible, I’m just so tired of seeing these people complain it’s all too hard.
The simple fact is, nobody is going to come along and give you a house. If prices fall, it will be to the detriment of the entire nation. If people really think house prices falling by 40 or 50% is going to be a good thing they are deluded. No bank will ever lend them the funds to buy one at those prices, in fact, there may not even be any banks around.
I actually think there are people out there who would like to see it happen, but I don’t think they understand the consequences of what it would mean if it did. The only way you will ever own one is to work hard, sacrifice, save, be realistic about what you buy, and take the plunge.
3x earnings is a bit of a misnomer. Back in those days the houses were at the urban fringe, with no driveway, curtains, floor coverings or landscaping, nor did they come bigger than a 3 bedroom one bathroom home. There was no outdoor entertaining area or shed, or even a clothesline, these were all added to later as people saved and did them themselves. Nowadays people want it all and want it now.
Adam Barker: “My parents bought their first home for $32,000 in 1978, and my Dad was on around $4,500 at the bank. 7 - 8 x earnings. Nothing is different nowadays.”
Really? An annual salary of $4,500 in 1978? I don’t think so, unless he worked only 1 day a week. The avarage annual income back then was in the 20-30k range, and home prices were closer to 3.5 times annual income.
And you’re wrong about the sizes of urban blocks too, many of the blocks available now are subdivisions of what were whole blocks in 1978.
James while I can’t vouch for it (I wasn’t around then) I’m going by what he told me a few years ago. His point was it was hard looking at a $32,000 debt and wondering how the hell he was going to pay it off. Average annual income in the 20 to 30K range, 30 years ago? I guess it all depends on where you live, but I seriously doubt that, not in South Australia anyway.
I didn’t mention anything about block sizes, but you’re quite right, many of the blocks nowadays are ‘split’ in two, but comparatively, those blocks that were on the suburban fringe 30 years ago are now only 20 km’s out. The distance from the CBD adds to their value. Not to mention the house takes up the whole block nowadays.
(((@Gary - people are not forced to put ‘their neck in a financial noose’, home ownership is a choice. If you don’t want to buy, don’t buy, rent, and invest the difference - but don’t whinge about it. )))
dear Ma…I am not whinging for me, but for those disadvantaged ones who continually fall through the cracks. believe me. I could buy and sell the building you work in 10 times over so i aint whinging for me, but it’s the pressure put on these poor souls by the media, behind the scenes cohersion and policy by successive govts and the police investigating the police policy and standards set by the corrupt realestate industry that make me wanna cry a river of tears
Since when is subtle cohersion not force?…besides, why are australians hung-up on the notion of home ownership in the first place?…as a nation if we did n’t have this furphy then all that money that goes into housing could be directed to business investment. If people could attain life-long leases on properties instead of soul destroying mortguages, then as in the case of Eastern Europe, italy, Spain, Portugal and many other parts of the world, then all that investment could be put to greater use in wealth creation not by clawing of the top of one another, manufacturing, employment…this is the horse before the cart and not the other way around. Even in the state of Israel you can’t own the land. Your mortgage is on the cost of the building…the land you lease from the govt and it’s nominal so the costs of putting a roof over your head are halved..less debt
sorry for all da spelling mistakes but it da bumpy car ride
OK, you say “Shelter and safety is a human right. Owning the shelter is a privelige, one people have to work hard for.”
Nostalgia aside, the figures show people work harder now than they did in previous generations. And most of that hard work goes to paying off the mortgage.
The majority of home owners today have that privilege not because of especially hard work, but because they got in first when affordability was multiples easier than it is now. Wouldn’t you agree?
Hi Gary, home owners in the ACT only get a 99-year lease, not freehold. It seems to make no difference; home prices over the last 15 years have still risen to bubble-like levels of 30 or more times rental yield and 7+ times annual earnings.
@Gary - Again, I do agree with you there are things in this world which are unjust. And I do agree there are powerful industries at work who sell the idea of home ownership as the Aussie dream - though it has been for many years.
I think the analogy with Europe is a stretch though. Sure we could place a life tenancy here in Australia but chances are people would want to move at some stage (ie raising a family, relationship and life stage changes). Also, in Europe, the population is a lot more decentralised, so we have so many small towns/villages where people live - there is not the pent up demand in a few central locations (ie cities) that we have in Australia. This is largely due to climate (as much of Australia is inhospitable).
We simply because we don’t have the regional centres other nations have, such as the US.
I think you’ll find that in Europe, the locations which are truly sought after (ie the places that make the travel shows and the framed artworks) prices are in the millions and beyond the reach of even high income earners, attainable only by the truly rich.
The thing is how are we going to change what people want? In Australia our culture has developed around the car, the home and the westfield shopping centre on weekends. We don’t have the communal living style Europe does where your home is essentially a place to sleep - and if we did have apartments which were a lot like that, Aussie’s would look at them and sneer - “I’m not living in THAT”. It’s what we want. I wish I could shake everyone who listens to Lady Gaga or Britney Spears and tell them they are being crazy, but it’s what they want.
@JMac - I would agree that there are a lot of reasons people work harder today. The mortgages are one reason, granted. Others are the ‘wanting everything now’ as I stated before ie the plasmas, the furniture package, the bedroom suite, the dream kitchen, the travel and the latest gadgets. I also believe HECS is an issue for those starting out as it chews into your income quite heavily, as well as the fact people tend to ‘float’ through their twenties, enjoying a social life and possibly a few careers before deciding what they want to do.
There’s nothing wrong with that and the world we live in these days allows us to do it, but, like you said, everything comes at a price. You decide whether you want to live with the $80 lounge suite and 34cm TV you got at a garage sale, or you go get the interest free deal and spend years paying it off. You can get the basic 3 bedroom 1 bathroom house without the bells and whistles, on the suburban fringe, affordably.
The problem is, the suburban fringe is now almost in another state. Infrastructure and decentralisation would help this.
Hi James
ok..got ya, but i think the situation in the ACT is different than the one I mentioned above.
In the example I mentioned above the cost of the land is not included in the actual purchase price, that part is not a cost, where as in the ACT the land cost is lumped in with the deal even though it’s only a 99 year lease…slight difference?
I agree that renting and investing the difference is the way to go, if home ownership isn’t (yet) an option. Gotta do something with your savings. Besides as Gary said, shouldn’t we collectively invest in business and innovation (or at least in the companies profiting from Australian land and resources), instead of … houses??
I would also agree that there is huge pressure in Australia for home ownership. At the risk of sounding sexist, most women I know find the security of home-ownership (vs renting) a necessity in raising families. For a young(ish) bloke, thats a big motivator.
Adam…I guess what you are saying is that before we can challenge ingrained culture, first there has to be a change in peoples thinking..the hearts and minds, and I agree with you in…good luck with that!…but their destiny is out of their hands. Yes they are to blame to some degree and they must accept responsibility for their own actions, but this will be made easier when all the false idols are taken out of the way so the sheeple can finally take stock of their life.
It’s blasted at them day and night as a consequence of living in a consumer driven society…they don’t stand a chance.
BTW..the European leases i mentioned are “Transfereable.”…some times at a small cost and in some instances a very small and minor industry has sprung up that deal in the transfer of these leases, but it’s still much more cheaper viable for them to have an affordable life-long lease than a life-long mortgage.
No stretch there Adam.
Hi Gary, yes I see your point.
Hi Adam, those luxuries like plasma TVs are not all that they appear. In the 80s I used to eat a whole meal of fresh fruit every day very cheaply. It now costs more to buy that much fruit for a year in Sydney than to buy a 50 inch plasma TV, and yet the few farmers still standing are poorer now. What gives? Plasma TVs aren’t a mark of luxury; they are a consolation idiot box for not having what you really want, if what you really want is a decent home to call your own and proper food for your kids. I get the impression most of us were richer before the mining boom began.
Pwnerous:
(((I would also agree that there is huge pressure in Australia for home ownership. At the risk of sounding sexist, most women I know find the security of home-ownership (vs renting) a necessity in raising families. For a young(ish) bloke, thats a big motivator.)))
Are you saying that home ownership is a prerequisite for getting L — d?…would n’t that be a sad state of affairs but I fear you are right!!!
Gary: Hahaha thats one way to put it - would certainly explain the obsession with Real Estate. As Dave Chappell said, the only reason a man would buy a Porsche is because chicks dig fast cars.
Sadly Gary I have friends in Sydney who have found this is the case - there are girls who will blatantly ask them in the first 5 minutes of a conversation, ‘own or rent?’ and if the wrong answer is given they take their bag and drink and walk away.
I’d have to say if you buy a girl a drink and never see her again, consider it money well spent.
(((Sadly Gary I have friends in Sydney who have found this is the case )))
Yeah, but not in Melbourne, Brisbane, Perth, Adelaide or Darwin???…right?..hahahaha
Gary: “Are you saying that home ownership is a prerequisite for getting L — d?”
I don’t think so. A prerequisite for being taken seriously for a long term thing? Maybe. And why not?
I don’t think men want a home just to please women — but a home in Double Bay? Yes, in many cases. You can see in the ABS demographics that the higher-priced a suburb is, the more proportion of young women there are. It’s probably a good way for investors to pick winning suburbs: areas with high young female population where the prices haven’t gone bananas yet.
Lots of men would rather live in the bush even if it means a lower income and simpler life. But they’d have to be prepared to live alone or come to a wife-sharing arrangement. Be OK if they’re gay, but most of the gays want to live in Double Bay too, just like the women.
((((Lots of men would rather live in the bush even if it means a lower income and simpler life. But they’d have to be prepared to live alone or come to a wife-sharing arrangement. Be OK if they’re gay, but most of the gays want to live in Double Bay too, just like the women.))))
James: hahahahehehehaha ..Will you stop it?…my sides are aching and i can’t take any more.
(((Yeah, but not in Melbourne, Brisbane, Perth, Adelaide or Darwin???…right?..hahahaha))))
ok ..I forgot Hobart…how did I forget Hobart?…stop it james, please,..I am gonna do myself an injury.
You also forgot Canberra. You know you shake that tree and out falls a mysoginist. Only this time we got three of them. Why did you forget Canberra?
If you are looking for a “mysoginist”?….then Dianna Brimble might be able to help you but she’s not around.
Canberra is cool.
james, Adam and Pwnerous if you are still there:
Just one more thing regarding Life-long leases verses mortgages, is that this would finally compel the banks to lend unsecured to SME’s , as opposed to stacking everything against their home mortage as they do, and it would also increase rabid and healthy competition between the banks.
I know there is unsecured debt on credit cards, but if you have a mortgage and a credit card, then rest a sure the debt on the credit card is secured against the equity in your home…the banks always sneak this one in without most people knowing.
BTW..it’s the SME’s that are responsible for the bulk of employment in this country, not the multie nationals or the bigger end of town companies…it’s the shop keepers, lunch bars, hair dressers, small engineering and fitting companies, small retailers etc etc etc of 1-20 people who are the salt of any economy but always draw the short straw in finance packages….perhaps Adam Schwab would have some figures on this…dunno.
There is so much that could be written on this ( but i am not a writer ) that would free up investment in business and enterprise rather than …”houses” that could change the focus and education of a nation into that..” nation of shop keepers”…mini entrepenuers who are not reliant on the “system”..but independent of big govt, banks and Big Institutions freeing them from the clock- on clock- off syndrome of slavery.
i am done
As the RBA controls the supply of liquidity, a new entity could control the supply of land.
It would follow town plans to requisition land as demand rose. Speculators on unimproved land would then get an assessed compensation rather than a manipulated market value. Land might still be sold, but it would sold into a market where the level of supply was controlled in the public interest - presumably the FHOs interests.
Hi Kaz, I didn’t forget Canberra. Have a porter for me at the old Wig And Pen, that’s my home town.
Gary, that sure is an interesting point about shifting bank loans from land scalping to productive business. And is probably another reason why the federal government would never contemplate it. The banks have long been called the “four pillars” and were considered even more crucial when the crisis hit. Not one bill has been passed in recent years that would displease these “four pillars”. A protected species that probably would not last five minutes in the pro-consumer banking regime of the US which they so like to sneer at.
Gary, I get your point it is always going to be hard owning a home and you have to work hard to afford it. I have worked really hard and I have a much larger deposit than most, all I want is a basic 3 bedroom home with a backyard in a provincial city. I would like to have a family and be able to do it on one income, so i am actually there for my children. K Rudd has made that dream impossible; housing has gone up 80k in my area since the grant has been doubled. It is just insanity and most of the buyers are young people with very little deposit. I can see when interest rates start to rise, there will be many foreclosures as these young people start to struggle with the massive debts they have.