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.