Housing supply and the intervention of foreign investors - May 2024

By Matt King, Senior Economist, HIA

The complex housing supply and affordability problem in this country requires a research-based, well-informed action plan. Recent ABS data revealed that in the 2023 calendar year we had the lowest level of housing commencements we have had in over a decade. In fact, new house commencements have been declining for over two years and multi-unit commencements are barely more than half the level of their 2016 peak. There were only 163,836 new homes that commenced construction in 2023, compared to more the 230,000 in 2021. We’ve fallen a long way in two years.

Looking ahead, at the rate seen in the final quarter of 2023, Australia will commence construction on just over 150,000 new homes in the 2024calendar year. This is a far cry from the 240,000 new homes per year needed under the Federal Government’s National Housing Accord.

HIA modelling suggests that under a medium income/medium population growth scenario, there is demand for 205,320 dwellings per year for the next 25 years. It’s worthwhile comparing that to the national 10-year average dwelling completions to date, which comes out at 192,391 dwellings per year. We’ve been underbuilding for years and current forecasts don’t have us building enough homes even to prevent the situation from getting worse. This is compounded by the fact that the rate of home building has broadly been decelerating since a peak in March 2017.

HIA has been publicly stating for some time that supply impediments in the housing construction market have been significant in most states – reflecting the lack of suitable brownfield and greenfield land for development, major inefficiencies in planning and development approval processes, inefficient and distortionary taxation of new housing, and an acute shortage of skilled labour for residential construction – which have all added to the time taken to build and to the cost of new housing.

If the Government is serious about their target of 1.2 million new homes over the next five years, every one of these areas must be addressed with smart and heavy-hitting policy reform/changes. Front and centre, all levels of government must depart from the modus operandi of boosting revenue through the substantive and highly detrimental taxation of new housing. By way of example, since 2015, a range of punitive taxes have been imposed on foreign investors by State and Federal Governments. The consequence of this is that these investors have withdrawn from the Australian market, and this is a key reason why the volume of apartments commencing construction is now barely more than half of what it was in 2016. 

With any crisis and efforts to pinpoint problems, there is genuine news and noise. Unfortunately, the housing supply and affordability conversation has a significant presence of noise. One of the key areas where the noise is most pronounced is when it comes to the participation of foreign investors in Australia’s housing market.

The fallacy of the intrusion and obstruction of foreign investors in the residential market is an unhelpful distraction in solving the housing equation. There has been a recent uptick in the rhetoric and policy manoeuvring to increase the taxation on foreign investors in national and state housing markets. While the stated justification is to boost new housing supply, this is based on incorrect assumptions. The actual outcome will be to hinder new housing supply.

Some of those incorrect assumptions include, 1) foreign investors are leaving homes vacant, 2) foreign investors are buying established homes in Australia, and 3) foreign investors occupy a significant share of the home purchasing market. These assumptions are misleading and contain outright falsehoods. It is worthwhile noting that all foreign investment in Australian real estate is screened by the Treasury through a prior approval process.

When it comes to addressing the first misleading assumption, the best source of data we have on dwelling vacancies is the Census. Each Census the ABS reports that around 10 per cent of homes were vacant on Census night. Around half of these ‘vacant homes’ are people away from their primary residence on Census night as they are on holidays, some are for sale or rent and therefore, only temporarily vacant, some are being repaired or renovated, and some are in regional areas away from employment opportunities. 

The ABS has reported that around 10 per cent of homes are vacant in each Census since 1986. This figure is consistent with other developed economies and is not the cause of Australia’s housing shortage. It is a fallacy to think that 10 per cent of Australia’s dwelling stock is left unoccupied by foreign investors for significant stretches of time. It is unhelpful for policy makers to suggest that homes are being withheld from the market when the more pressing problem is that governments continue to increase tax imposts on hew homes.

The second assumption that foreign investors are buying established homes in Australia, is extremely misleading. We must note that the Foreign Acquisitions and Takeovers Act 1975 prohibits foreigners from purchasing established homes in Australia without prior written consent from the Australian Treasurer. In the most recent year that the Government has published data, 2021/22, there were just 1,339 established dwellings approved by the Australian Treasurer to be purchased by a foreigner. This is in a market of 583,039 transactions or just 0.23 per cent of homes transacted.  

As for the third assumption that foreign investors occupy a significant share of the home purchasing market, Reserve Bank research indicates that for much of the past decade or so approvals granted for foreign investment in the residential sector have remained around 5–6 per cent of the value of dwelling turnover in Australia. An albeit imperfect way of seeing this is the number and value of approvals by the Foreign Investment Review Board (see graph below). 

From 2014-2016, there was a surge in foreign investment in residential property, particularly from China. This was apparent not just in Australian cities, but also in ‘international’ cities in other countries. In Australia, the demand was particularly strong in Sydney and Melbourne, given the global profiles of these two cities and their large foreign student populations. However, more recently, this source of demand has waned, partly as a result of the increased difficulty of moving money out of China as the authorities manage capital flows.

The timing of these shifts in foreign demand has broadly coincided with – and reinforced – the shifts in domestic demand. However, making a full assessment of their impact on prices is complicated by the fact that international property developers were also adding to supply in Australia at a time of very strong demand. More recently, these developers have also scaled back their activity. It seems we’ve now returned to the long-term trend of foreign investors contributing to around 5 per cent of the value of dwelling turnover in Australia, or even lower.

Interestingly, the Reserve Bank has reported that European governments have recently been looking to increase foreign residential investment from outside the European Union. The RBA also notes that Hong Kong, Malaysia and Singapore have comparatively minimal restrictions on foreign investment in their new and established housing markets.

Foreigners are not responsible for the shortage in Australia. They in fact, play a crucial role in increasing the supply of homes in Australia. The notion that they are crowding out first home buyers is baseless, as the Reserve Bank notes that foreign purchases appear to be most concentrated in higher rather than lower-priced dwellings. The fundamental truth is that foreign investors build new homes, they don’t live in them, and cannot take them out of the country. They are the key to addressing the inequity that falls hardest on Australian renters.

In order to address the acute shortage of housing stock, governments should seek to attract more investment in home building including from overseas investors and focus their policy efforts on scaling back the increasing cost of building new homes through additional regulatory imposts.

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