The value of approvals for foreign investment in Australia’s housing market slumped in the last financial year, dropping to levels not seen since the tail end of the global financial crisis.
According to Australia’s Foreign Investment Review Board (FIRB), a total of 10,036 residential real estate applications were approved for proposed investment in the 2017/18 financial year, totalling $12.5 billion, the lowest total since 2009/10.
That was well below the 13,198 approvals granted in the prior financial year. In dollar terms, the total value of approvals was also $17.5 billion than a year earlier.
The FIRB said there were many factors that may have contributed to the fall in the number and value of residential real estate approvals last year.
“Anecdotal evidence from Treasury’s business liaison program points to a drop off in demand from overseas buyers,” it said.
“Contacts have cited state taxes and foreign resident stamp duty increases, foreign investment application fees, tightening domestic credit and increased restrictions on capital transfers in home countries, as some of the factors dampening foreign demand.”
The FIRB said 74% of the decline in the value was due to lower approvals to buy new homes, in part impacted by new restrictions on the proportion of new developments that can be sold to offshore investors.
“88% of the decline in new dwelling approvals was attributable to a drop in approvals for new dwelling exemption certificates (NDECs),” it said.
“Part of the drop in NDEC values is because of the reduction to the maximum proportion of new dwellings in a development that foreign persons can acquire using the certificate.
“In the 2017-18 Budget, a 50% limit on the number of dwellings in a development that can be sold to foreign persons was introduced.”
NDECs allow developers to receive pre-approval for foreign persons to purchase new dwellings in the specified development up to a cumulative total of $3 million per foreign person.
By location, 69% of approvals to invest in Australian housing were located in just two states — Victoria and New South Wales.
46% of national approvals were located in Victoria, double the 23% that were granted in second-placed New South Wales. Queensland, at 17%, also took a sizable share of national approvals. Approvals in the less populous states ranged between 1% to 7% of the national total.
Including approvals for both residential and commercial real estate, the FIRB said the dollar value of Chinese real estate approvals stood at $12.7 billion, the largest of any individual nation.
While China’s share of total real estate approvals still the largest at around 30%, the value of approvals have plummeted in over the past two years when total approvals from China topped $31.9 billion.
Singapore and the United States, at $7.8 billion and $5.8 billion respectively, were the second and third-largest investors in terms of proposed investment.
At $52 billion, the total value of approvals to invest in Australian real estate now sits at the lowest level since the 2012/13 financial year.
Along with domestic factors such as tighter lending standards, uncertainty over the tax treatment of housing ahead of this year’s federal election and reduced demand due to increasingly pessimistic views on the outlook for prices, the significant drop in foreign approvals has clearly had an impact on Australia’s housing market.
According to CoreLogic, Australia’s median home price fell by 4.8% last year, the steepest decline over a calendar year since 2008. The national price decline was led by Sydney and Melbourne where values fell by 8.9% and 7% respectively. They just happened to be the hot spots for foreign investment in previous years.
With price declines continuing into early 2019, approvals to build new dwellings have tanked in recent months, especially in the apartment sector. Those dwelling types were also those typically favoured by foreign buyers.
George Tharenou, economist at UBS, says those trends look likely to continue for some time yet.
“Last year we argued a collapse in foreign investment as one of seven factors for a credit crunch. This reinforces that view,” he says.
“With an easing of policy towards foreigners not expected, the outlook for housing is still getting worse.
“We expect dwelling investment to fall sharply with house prices to double the fall seen so far, representing a record 14% peak-to-trough in values.”
– Business Insider
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