Australia for sale

With mortgage approvals in Australia falling of a cliff, and Real Estate agents reporting such a strong property market at a time when the market is flooded with near record levels of listings, one has to ask who is buying?

Mortgage approvals in Australia are down 21 percent from its peak in September 2009. The last month of data shows a 7.9 percent fall for January making it the biggest fall in mortgage approvals for a decade. Since then banks have been continuing to tighten loan value ratios (LVR) for both first home buyers and investors, suggesting bigger falls are to come. It is starting to become common to require a 20 percent deposit, which means for both investors and first home buyers, some sizable and solid savings are required before they can enter the market.

Residential property markets around the country are inundated with listings. The Sydney Morning Herald has reported Sydney has a record 2860 houses and units for auction this month, double the 1400 listings the same time last year. Despite this, Real Estate agents are continuing to report a shortage of homes for sale to create an atmosphere of utmost urgency – buy now or be priced out for ever they claim. The Melbourne Age even writes the “Red Hot Melbourne market starts to glow white!”

So if the number of listings is going through the roof, yet the number of loan approvals through the floor, what is underpinning the market at the moment? Cash savings you say – very funny, we spent all our savings years ago.

The answer may come from the easing of restrictions for foreigners to purchase properties in Australia. In 2008 during the GFC, the government needed to find ways to get more money to flow into Australia to underpin the “strength” of our economy. One such way was to remove some restrictions and make it easier for foreigners to purchase property without government or FIRB (Foreign Investment Review Board) approval. The government called it streamlining of administrative requirements.

While all statistics sourced from Real Estate agents and their lobby groups should be taken with a grain of salt, some RE agents are suggesting as much as 30 percent of all residential property sales at present are to foreigners. With a surge in listings, and loan approvals down 21 percent to the end of January 2010, there is no reason to doubt that number. If anything it could be a little light on, but remember Real Estate agents exaggerates the numbers, so potentially the market isn’t glowing as white hot as some would want you to believe. Maybe the white is actually a yellowish-orange tinge at 3200K, not 6500K (degrees Kelvin, a measure of colour temperature).

As these changes to foreign investment were likely to become politically sensitive, no records are kept on the number of purchases made by foreigners. This makes understanding what exactly is happening in the market a difficult one.

On the back of such a strong housing market, the RBA has been cranking up the rates in a bid to slow the market down before it makes our current and unprecedented housing bubble a magnitude worse. But will interest rates have any effect to foreign investors using funds sourced outside of Australia? If the market is read wrong, the RBA could be penalising Australians, both the unproductive property market and productive businesses which underpin and create jobs and real value.

In a finance industry conference held in Sydney yesterday, RBA Governor Glenn Stevens said that if the purchase of property by foreigners who borrow abroad becomes “a large-scale phenomenon,” then raising interest rates in Australia wouldn’t “make any difference to them.”

“[The] question of the role of foreign purchases is an important one and it’s one we’re giving some attention to”, adding that hard facts about the trend is difficult to find. The RBA is closely watching foreign investment in our housing market and if it is contributing to the surge in house prices in recent quarters.

The government now has a big problem, both politically and financially. If they can’t seize back control of the housing market, Australian citizens will be forced to accumulate more debt and spend more on housing expenses as a percentage of the household budget at the expense of discretionary spending further impacting local jobs and businesses. Not only will we not be able to afford basic housing, we will have no jobs.

“In an environment where the affordability of housing is very poor, perceptions that foreigners are fueling house prices could become an issue” for the government, said Shane Oliver, senior economist at AMP Capital Investors.

» Chinese buyers underpin housing prices – The Australian, 27th March 2010.

» Home owners blitz the auction market – The Sydney Morning Herald, 27th March 2010.