FIRB Property Investment Trends
Looking back a little over 3-years ago, would be foreign investors in local residential property were the reprobates of the Australian housing market. Foreign investors became the targets for a great deal of negative publicity.
Publicity that included accusations of forcing up house prices, forcing up affordability and even unfairly competing with locals who had to battle just to try a buy a house, a roof over their heads for themselves and their families.
Foreign buyers were also said to be buying properties and then just leaving them vacant, and so further inflating prices and rentals. It was not sentiment only confined to Australia.
It was an international trend that saw national and provincial governments here, and in many other countries including New Zealand, Canada and the United Kingdom introduce strident new measures. Measure that were designed to restrict foreign buyers from entering their respective residential property markets.
With various restrictions and legislation in place, where do we stand today and what’s been some of the trends in the intervening period?
It’s an interesting question as we see many aspects of investment and free-trade take-on an increasingly political nature.
While the official figures tend to lag a little, the FIRB’s annual report for 2017-18 shows some trends and possible repercussions that have impacted the residential market.
Whether the figures are seen as positive or negative only further history will tell however, it’s clear there has been a major impact and foreign investment has slowed across the board.
FIRB Approvals Fall
Approvals across all industry sectors shows that in 2016-17 there were a total of 14,339 FIRB approvals valued at $197.7b and in 2017-18 total approvals fell to 11,060 valued at a lower figure of $163.1b.
These figures reflect the fact that both non-real estate and real estate sectors fell, although among non-real estate sectors there were some variations.
Among non-real estate sectors; services, mineral exploration & development and finance & insurances rose. While manufacturing, electricity & gas fell.
However, it’s the figures for real estate that show big declines lead by residential real estate. In 2016-17 foreign investment into residential real estate was $30.6b and in 2017-18 that feel to just $12.5b. The commercial real estate sector also fell although more modestly, from $43.7b in 2016-17 to $39.5b in 2017-18.
In 2017-18 residential real estate’s share of the total value of FIRB approvals was 10% and commercial real estate 24%.
The decline in approvals for residential real estate sourced by foreign investment peaked in 2015-16 (in both numbers and dollar value) and is demonstrated by the following figures:
- 2014-15: 36,841 approvals valued at $60.8b
- 2015-16: 40,149 approvals valued at $72.4b
- 2016-17: 13,198 approvals valued at $30.0b
- 2017-18: 10,036 approvals valued at $12.5b
The figures show very obvious trends, the 2017-18 levels are just 25% of the peak and with purchase values sitting around just 17%, marking a very big fall in the flow of foreign investment into the new and established housing markets.
Behind the Decline
The FIRB devotes some attention to backgrounding this very obvious decline and the figures are well-worth a closer look. Between 2017-18 and 2016-17 there was a decline of 3,162 approvals, which accounted for a decline of $17.5b in the value of approvals.
FIRB and Treasury suggest some factors to help explain this, including the introduction of new/additional state taxes and foreign resident stamp duty increases, higher foreign investment application fees, tightening domestic credit and increased restrictions on capital transfers in home countries, as some of the factors dampening foreign demand.
It’s worth noting that 74% of the $17.5 billion fall in overall residential real estate approvals can be attributed to a drop in new dwelling approvals.
In turn, 88% of the decline in new dwelling approvals was attributable to a drop in approvals for new dwelling exemption certificates (NDECs), which further reinforces the withdrawal of foreign investment form our markets.
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.
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 certificates.
In the 2017-18 Budget, a 50% limit was placed on the number of dwellings in a development that could be sold to foreign persons was introduced. From May 2017, a NDEC for a development worth $250 million for all apartments would be valued at $125 million to account for the limit.
However, the average value of an NDEC has dropped more than 50%, which indicates that the measure is not wholly responsible for the significant decrease in the value of NDECs.
State by State Figures
In 2017–18, 70% of all residential real estate approvals given to a single state or territory were for purchases in Victoria or New South Wales.
However, the value of residential real estate approvals in these two states roughly halved compared to the previous financial year. The share of residential real estate approvals by state and territory in 2017-18 by number was: Victoria 46%, NSW 23%, Queensland 17%, South Australia 3%, Tasmania 1%, ACT 2% and Western Australia 7%.
The number of approvals per state 2017-18 shows three states with the majority of approvals; Victoria 4,631, NSW 2,340 and Queensland 1,723
Out of the total FIRB approvals for 2017-18 there were 1,615 approvals for the purchase of established residential dwellings, these are for temporary residents for their use while they remain in Australia. A small number of approvals are also given to people who operate substantial local businesses to house Australian-based staff.
In my next post I’ll look at approvals for development and a more detailed break-up of approvals since 2014-15, which might help further explore if the various rules have been a positive for the housing market and economy.