Australia becoming too expensive for foreign investors, report reveals

Chinese investors have been at the forefront of the decline in foreign investment in Australian residential real estate during the 2023-24 financial year, according to the Foreign Investment Review Board (FIRB).

Overseas buyers collectively spent $6.6 billion on Australian homes over the past financial year, a $1.3 billion drop from the $7.9 billion recorded the previous financial year.

Of that shortfall, $800 million was attributed to reduced activity from China-based property investors.

While China remained the leading source of approved residential real estate investment proposals in the June quarter, interest from Chinese buyers has notably waned.

According to the FIRB, the fourth quarter of FY2023-24 saw a decline in both the number and total value of approved investments from all countries. Approved residential real estate proposals dropped to 1,199, down from 1,428 in the previous quarter, with the total value sliding 22% to $1.4 billion from $1.8 billion.

China accounted for the highest investment value at $0.4 billion, followed by Hong Kong, Taiwan, Vietnam, and India, each contributing $0.1 billion.

Priced out of Australia

Juwai IQI Co-Founder and Group Managing Director Daniel Ho said Australia is simply becoming too expensive for foreign investors.

"Foreign homebuyers in Australia now have a new and unexpected complaint: affordability. They are starting to sound a lot like local buyers," he said.

"Remember that foreign buyers pay much more to purchase and to hold property in Australia than local residents and citizens. They have extra taxes, fees, and duties that local buyers don't have to worry about.

"Even the interest rates they pay on their mortgages are higher because they can't borrow from the big four banks. Their mortgages can carry interest rates that are more than two percentage points higher than the rates a local buyer might pay on their mortgage. On a million-dollar loan, a typical foreign buyer would have to pay at least $1,300 per month more than a local buyer."

According to statistics from Juwai IQI, Melbourne remains the top destination for mainland Chinese buyers, followed by Sydney, Perth, Brisbane and Adelaide.

"The median property price of Chinese buyers in Australia is $730,000, and 98% of buyers say they are purchasing for their own use. So, the offshore investor that was so common in 2014 to 2018 really no longer exists."

General Manager of Plus Agency Peter Li said foreign investors are hesitating because of the high costs for the FIRB application fee and of foreign buyer stamp duty.

"Once they own the property, they find themselves paying high interest rates to the private lenders who finance their purchases, and on top of that land tax. They have the wealth to purchase the property, but Chinese buyers in particular often need a mortgage because they sometimes can't move money overseas quickly," Mr Li said.

"Another reason foreign buying activity is dropping is that many buyers of foreign origin have gotten their Australian residency already. They are no longer FIRB buyers but purchase and live here like any other resident or citizen.

"The volume of Chinese people buying in Australia is still high, but a lot of them are no longer FIRB buyers. Three years ago, one out of five mainland Chinese purchasers we worked with had to go through the FIRB process, but now it’s only around 8% of buyers."

Government's $1bn housing setback

This strikes a blow to the Albanese government's goal of building 1.2 million homes by mid-2029 as part of its National Housing Accord.

International investors approved by the FIRB are restricted from purchasing existing homes, which means they play a key role in driving the construction of new properties.

However, the Housing Industry Association (HIA) has raised concerns, warning that fewer than a million homes may be built within the planned timeline.

“The volume of apartment construction needs to double current approvals numbers in order to achieve the Australian Government’s target of 1.2 million homes over five years,” HIA Economist, Maurice Tapang said.

HIA Senior Economist Matt King warned that the recovery in new home building depends on removing barriers for foreign investors.

“Housing investment is encouraged by certainty of policy settings. Recent state government announcements to levy increased surcharges on foreign investors and introduce taxes on short-term rental accommodation are unhelpful at a time when stability is needed to achieve the 1.2 million home target.

“Failure to implement policies such as expedited land release, concessions on property taxation, and accelerated development approval timeframes; risk slowing the rate of home building over the next five years."

Photo by John Lockwood on Unsplash