Australian approvals of home purchases by foreigners is on the rise, driven by increasing wealth globally and better integration with Asia, according to central bank assistant governor Christopher Kent.
“The data clearly show an increase in the level of approvals for foreign residential purchases over time,” Kent said in a statement to a parliamentary panel in Sydney today. “But it is difficult to know how much this has boosted net demand for Australian housing.”
Kent was testifying at an inquiry by lawmakers into foreign buying of domestic real estate in response to concerns by locals that overseas demand, particularly from China, is driving up prices and reducing affordability. Chinese buyers overtook Americans to become the biggest purchasers of Australian commercial and residential property last financial year as investment surged 42 percent to A$5.9 billion ($5.6 billion), according to the Foreign Investment Review Board.
The Reserve Bank of Australia cut its overnight cash-rate target by 2.25 percentage points between late 2011 and August to a record-low 2.5 percent to aid domestic demand and boost industries including residential construction. Dwelling prices climbed 10.7 percent across Australia’s eight state and territory capitals in the 12 months to May 31 to a median A$545,000, according to the RP Data-Rismark home value index.
“The rise in prices has primarily reflected increased housing demand from Australian residents and citizens, partly owing to low interest rates,” Kent said today. The RBA “wouldn’t welcome further strong price growth of this level year after year.”
A long, sharp increase in home prices, a surge in credit and a significant drop in lending standards are needed to put the housing market at risk, he said. While the increase in prices so far has led to a small rise in credit, that growth remains relatively modest, according to Kent. There also hasn’t been a “wholesale and significant drop in lending standards,” he said.
Overseas purchasers bought a record 13.9 percent of new properties and 9.5 percent of established homes in the first three months of the year, a survey of real estate professionals by National Australia Bank Ltd. released April 16 showed.
The influx of foreign capital, combined with limited new supply and continued low interest rates, mean the housing market is “increasingly likely to get caught up in a positive price-feedback loop and eventually could face a correction,” Steven Hess, senior vice president for sovereign risk at Moody’s Investors Service, said in a statement yesterday.
Kent attributed the rise in prices to “robust” population growth of about 1.7 percent a year and a lag in supply. A “pretty noticeable pickup” recently in building approvals and a subsequent increase in dwelling investment look set to continue and will help ease supply constraints, he said.
Building approvals rose a seasonally adjusted 1.1 percent in April from a year earlier, following a 21 percent surge the previous month, data from the statistics bureau showed.
Foreign demand for housing has also supported the local construction industry, and has drawn developers from overseas into the domestic market, Kent said.
Australia tightened rules on foreign investment in real estate in 2010, requiring offshore buyers to purchase only new properties, and introduced penalties to enforce the changes. It also said temporary residents must obtain approval from the Foreign Investment Review Board to buy homes, and must sell when leaving the country.
Data from the Foreign Investment Review board show foreign purchase approvals have remained between five percent and 10 percent of national housing turnover in value terms and about half that in terms of numbers, Kent said today. Actual purchases by foreigners are also likely to be lower than the data suggest, as not all approvals lead to a purchase, he said.