A new report from the Australian government has concluded that foreign investors are not driving property price growth, but a ‘herd mentality’ could be to blame.
Released this week, the Treasury working paper titled ‘Foreign Investment and Residential Property Price Growth’ is based on an extensive study using fixed effects panel regression techniques to estimate the impact of foreign demand for Australian residential real estate on property prices.
The study used data from 2,366 postcodes over a 57-month period from July 2010 to March 2015.
“All model specifications find a positive relationship between foreign investment approvals and price growth at the postcode level, but the majority of price growth experienced in recent times does not appear to be attributable to increased foreign demand,” the report found.
“This is unsurprising given that in the short run the supply of residential property is relatively fixed so any increase in demand, whether domestic or foreign, should result in higher prices.
“Indeed, there have been many other significant domestic drivers of property prices over the period examined.”
The report highlighted a number of reasons for rising property prices including a low interest-rate environment, financial deregulation and demographics. It noted one “psychological theory” whereby expectations about future price growth explain property prices.
“Varying degrees of ‘herd mentality’ have been found in Australian property markets, with Sydney being the most ‘excitable’ housing market,” it said.
The report pointed to other studies that have found that when there is very strong property price growth in a quarter, this is followed by a higher than otherwise rate of price growth in the following quarter.
The report concluded that foreign demand has accounted for only a small proportion of the increase in property prices in recent years.
“The increase in prices attributable to foreign investors is between $80 and $122 on average in each quarter for a typical postcode, compared to the average quarterly increase in property prices of around $12,800 in Sydney and Melbourne during the study period,” it said.
Commenting on the report, Juwai.com CEO Charles Pittar said most experts believe Sydney and Melbourne are heading for price slowdowns.
“If we want to keep adding new homes to the supply despite that, then we need to encourage foreign buyers — rather than push them away,” he said.
“The results are no surprise. They confirm what we have said for years. Offshore buyers drive huge benefits for the Australian real estate market and economy, as well as billions of dollars of job growth and physical investment in new housing.
“It sounds a bit harsh for the FIRB to say Australian property buyers have a 'herd mentality,' but we certainly love our real estate.”