As real estate prices soared in Sydney, many pointed the finger at foreign buyers as having a big role to play in inflating the market.
We take a look at the bigger picture, including recent changes in regulations that have decreased foreign buying and overseas investor activity.
Who are foreign buyers?
While perceptions of foreign buyers often centre on Chinese investors, our foreign investment market is actually very broad. It includes ex-pat Australians buying property in Sydney while overseas; foreign nationals from various countries seeking a secure investment; and people who hold dual citizenship in Australia and elsewhere.
According to Domain, China remains the biggest source of Australia’s foreign real estate investment (approximately 30 per cent), followed by Canada as a distant second with the United States, Singapore and Malaysia comprising the top five.
What can foreign buyers purchase?
Legislation changes in 2015 tightened rules around what investors could buy and what it would cost them, largely in response to concerns overseas buyers were pushing up prices. Under the new laws, non-resident buyers may only purchase new properties, not established ones, or vacant land for development, which must be completed within four years of approval. Overseas buyers also have to seek approval from the Foreign Investment Review Board (FIRB) and pay hefty application fees. They are also charged additional stamp duty in all states except the Northern Territory as well as a land tax surcharge in some states. What’s more, the banks now require larger deposits (upwards of 40 per cent) for overseas buyers to get mortgage financing.
Impact in recent years
Foreign buyer interest in Sydney boomed in recent years. The second half of 2016 in particular saw huge investment from Chinese buyers. This interest did much to increase our housing supply – without it, many new developments would not have been possible. Contrary to public opinion, however, most Chinese investors were not competing with first home buyers but rather looking at the prestige end of Sydney’s real estate market.
In 2017, researchers at the University of Technology Sydney (UTS) surveyed almost 900 Sydney residents about their perceptions of foreign and Chinese investment. They found concern that overseas investors were pushing up Sydney house prices and a common belief that government regulations weren’t doing enough.
Almost 56% believed foreign investors should not be allowed to buy residential real estate in Sydney, with 78% believing foreign investment was driving up housing prices in greater Sydney. However, interestingly, those who already had real estate investments were more likely to support foreign investment.
A report by the Foreign Investment Review Board in 2017-2018 showed that while 64% of Sydneysiders believed that foreign investors were driving up prices, in fact this demand only accounted for $122 of the $12,800 quarterly rise in Sydney house prices.
Is the foreign buyer boom over?
A report by Australia’s Foreign Investment Review Board (FIRB) released in May 2018 found that foreign investment had plunged by 58 per cent year-on-year from $30 billion in 2016-17 to $12.5 billion in 2017-18. Around the same time, an online survey of Chinese buyers by Swiss multinational investment bank UBS suggested a serious decline in interest in Australian real estate compared to the heady peak of 2016.
Why is foreign investment falling?
A number of factors account for the decline, including state and federal government reforms that introduced a hike in charges on foreign purchases, less favourable tax treatment for foreign buyers, and a cap on new development sales. A weaker housing outlook and fears that the market has peaked have also played a role, as have tighter capital controls overseas, particularly in China.
Impact on Sydney’s property market
None of this is good news for an industry already feeling the pressure of tighter lending conditions, a slowing market and weak household income growth. Sydney’s prestige market, in particular, saw a sharp reduction in foreign buyer sales following the state government’s decision to double the stamp duty surcharge to 8 per cent for foreign buyers.
However, while decreased foreign buyer activity is undoubtedly having an impact, it’s important to remember that the impact of foreign investment is often overstated. As always, much comes down to the specific market, property and timing of a sale.
If you want more information about buying or selling a property in Sydney’s inner city, contact our team today.