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Unbelievably, I have written about the Australian property market, Chinese investors, and negative gearing. It’s pretty scary.

Unbelievably, I have written about the Australian property market, Chinese investors, and negative gearing. It’s pretty scary.

This is an odd post for me that I am not really qualified to make, so if you’re a qualified economist please accept my apologies. If you believe the papers, you would think that Australia is being swamped by Chinese investors, who armed with thick wads of cash are driving up property values and making owning a house unaffordable for ordinary had-working Aussies.

Here’s a sample of recent headlines:

I reckon the reality is a little different. A combination of sloppy journalism and good old Australian xenophobia has resulted in the influence of foreign (Chinese) buyers being massively exaggerated.

The laws of foreigners purchasing property in Australia are pretty clear. According to the Foreign Investment Review Board Australia’s foreign investment policy is intended to solve the housing supply problem by limiting foreigners to purchasing:

  • Foreigners can normally get approval to buy vacant land — as long as they start continuous construction within 12 months.
  • Foreigners can normally get approval to buy existing residences for redevelopment — as long as this will increase the supply of housing. As well, the house must remain unoccupied during redevelopment.
  • Foreigners can normally get approval to buy units, townhouses, and house/land packages in a
    new development.

According to a well publicised Credit Suisse report Chinese investors have invested $24 billion on Australian property over the past seven years, and are set to spend $5 billion per annum over the next 7 years. The bank claims that although a small part of the property market, the cashed up investors are driving prices up and decoupling house pricing from incomes with the logical result that houses become more and more unaffordable for (hard working) Australians.

The impact of Chinese investors in the market is being overstated at the expense of focussing on the regressive negative gearing tax incentives which have fuelled a massive boom in property investment.

According to 2013 Australian Bureau of Statistics (ABS) data, the value of finance commitments for construction, new, and established housing grew an impressive 16% over the year. The growth was pretty even across each category so this means the argument that Chinese investors are buying ALL OUR NEW HOMES needs to be dismissed.

The total value of housing finance commitments at the end of 2013 was an impressive $52 billion. If we assume that this represents the approximate size of the Australian housing market, the reported Chinese investment of $5 billion is not monumental.

What isn’t reported is that the new housing market is pretty small – 6% in 2013 although it is a little larger in Melbourne and Sydney where developers have been splurging on building apartments in the central business districts. The bulk of the Australian property market at least for finance is established homes and renovations.

When you look at the ABS data on the number of dwelling commitments the impact of investors is pretty stark. Overall volume grew 26% in 2013 with owner occupied growing 19% and the investor sector growing a massive 39%.

Thirty nine percent!

As this RP Data article points out, the primary reason for property price growth is the growth in investor demands which is at a historic high.

So possibly, house prices are going up because investors are splurging on property and not because people who look different to us are BUYING ALL OUR HOUSES.

And why wouldn’t you invest in Australian property? The generous negative gearing provisions mean that Australian property investors can deduct any losses they make on investments (including mortgage interest) from their overall income when they calculate their tax liability. The Gratton Institute has calculated that quarantining negative gearing would save $4 billion a year in lost tax revenue – that’s money for education, health, or “paying back Labor’s debt” to quote Treasurer, Joe Hockey.

Winding back negative gearing would also free up investment dollars for more productive investments and help more renters become home owners.

My (slightly paranoid) view is that it’s easier to focus on the Chinese as the culprit for rising house prices rather than investors because Australia is naturally and deeply xenophobic, and the chattering class have no interest in better policy outcomes, only their own investment outcomes.

Like most things requiring deep analysis in Australia, the scope and nature of the debate needs to change for their to be any .

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