On Thursday night, Moody‘s Investors Service warned Australia’s real estate market may be overheating and it “appears to be increasingly likely to get caught up in a positive price-feedback loop and eventually could face a correction.”
Echoing warnings from the International Monetary Fund (IMF) last week, Moody’s indicate “both price-to-income and price-to-rent ratios [are] reaching levels well above historical averages. Housing prices continued to rise in Q1 2014 as average year-over-year growth in the eight largest cities inched up to 8.3%, marking the highest growth rate in nearly four years.”
Moody’s indicated our 50 year low interest rates were “playing a dominant role in fuelling the housing market”, but also warned on the role of foreign investors pushing up prices.
The third public hearing into foreign investment in residential real estate was held last week.
Consistent with the Moody’s report, Reserve Bank assistant governor Christopher Kent, told the inquiry its low interest rate setting was more responsible for driving housing prices than foreign investors.
The Australian Bureau of Statistics told the inquiry, data on foreign investment is “patchy”. It regularly scanned trade magazines and newspapers to try to ascertain the level of foreign investment.
“We do scan press reports and real estate specialist magazines to try to identify purchases of real estate, and [to] record those and record valuation changes from those. But I have to say, that’s a bit hit and miss,” assistant statistician Paul Mahoney said.
Foreign Investment Review Board (FIRB) statistics for the three quarters to March show approvals surged 93 per cent representing some 13 per cent of Australian real estate turnover. While it was noted the 93 per cent surge represents approvals and not all approvals are likely to lead to a sale, it also noted many foreigners were flouting the rules and this is likely to cancel each other out. On Friday, the inquiry heard from property industry experts suggesting the latest FIRB are in fact representative of the current market.
Committee chair Kelly O’Dwyer said she believes the rules are being bent, but is unclear how significant the issue is given the lack of data, “I am not prepared to put a figure on it.”
“Suffice to say, it is a very real concern. Evidence has been presented to the committee that would give us cause for that concern.”
One concern is the lack of compliance and enforcement. Some foreign investors considered the $85,000 fines for buying existing dwellings, not new ones, as the cost of doing business in Australia.
It is believed the committee is considering a special tax or stamp duty for foreign buyers to help prevent the Australian property market from further overheating that could lead to even more severe economic stability risks.
Canada faced the same issues Australia now faces. Citizenship and Immigration Canada (CIC) said its foreign investment scheme was “abused” and contributed little to the Canadian economy. It suspended its Immigrant Investor Program (IIP) in July 2012 while undertaking an inquiry into the scheme. In February 2014, it axed the program effective immediately. This action is though to be leading to more demand for Australian real estate.
» Moody’s Warns on Australia House Prices – The Wall Street Journal, 26th June 2014.
» Moody’s sounds alarm bell on housing prices – The Australian Financial Review, 27th June 2014.
» Moody’s warns on Aust house prices – Business Spectator, 27th June 2014.
» Is the bubble about to burst? Australian property market ‘in danger of overheating’ – The Daily Mail, 27th June 2014.
» ABS has ‘patchy’ figures on foreign investment in homes – The Sydney Morning Herald, 26th June 2014.
» Cashed-up foreign real estate investors view $85k fines as cost of doing business, parliamentary committee told – The ABC, 27th June 2014.
» Special taxes considered by parliamentary inquiry into foreign real estate investors – The ABC, 28th June 2014.