China continues to be the largest source of investment in Australia with the latest FIRB figures showing a surge in real estate applications over the 2016 financial year.
The Foreign Investment Review Board’s (FIRB) annual report 2015-2016 shows that foreign investment applications grew by 9 per cent to 41,445 in 2015-16 from 37,953 in 2014-15. Most of the growth was driven by residential real estate transactions.
For the third year in a row, China was the largest source of approved investment ($47.3 billion).
Residential real estate applications jumped 19 per cent to $72.4 billion from $60.8 billion.
However, the actual impact of foreign investment on property prices remains small. The FIRB paper found that foreign demand increased prices by between $80 and $122 in Melbourne and Sydney in each quarter between 2010 and 2015, compared to the average quarterly increase of $12,800 in Australia’s two largest cities during the period.
The figures come as measures announced in the federal budget last week looked to curtail foreign investment in a bid to improve housing affordability. The government plans to tax vacant properties, limit the share of foreign investment in new projects and increase foreign investors taxes.
HIA deputy managing director Graham Wolfe said these measures "send exactly the wrong signal" to potential investors in Australia and that barriers to investment are not productive for the building industry or the broader economy.
Charles Pittar, CEO of Chinese international property Juwai.com, said every Chinese dollar invested landed in the pocket of an Australian somewhere.
“Chinese investment translates directly into jobs, tax revenue, economic growth and new housing construction. There’s nothing about it that any reasonable person can object to. Frankly, China has been a godsend for Australia these past 10 years,” Mr Pittar said.
However, he noted that over the past year growth in Chinese investment has levelled off, from 90 per cent growth in Chinese buyer inquiries via Juwai.com in 2015 to 28 per cent in 2016.
“Growth will probably be lower still this year, unless it receives some sort of push from loosening regulations in China,” Mr Pittar said.
Last year the Reserve Bank of Australia warned that a fall in Chinese demand for Australian property could have serious consequences for local lenders. In its April 2016 Financial Stability Review the RBA predicted that a substantial reduction in Chinese demand would likely weigh most heavily on the apartment markets of inner-city Melbourne and parts of Sydney, “not only because Chinese buyers are particularly prevalent in these segments but also because other factors would reinforce any initial fall in prices”.
“These include the large recent expansion in supply in these areas as well as the practice of buying off-the-plan, which increases the risk of price declines should a large volume of apartments return to the market if the original purchases fail to settle.”
While Australian banks have little direct exposure to Chinese property investors, the Reserve Bank fears a reduction in demand could trigger broader risks for local lenders.
“Although the direct exposures are small, if a reduction in Chinese demand did weigh on housing prices, this could affect banks’ broader mortgage books to some extent,” the RBA said.
Earlier this year the federal government forced the foreign owners of 15 illegally purchased properties to sell, taking the total number of forced sales to 61 since May 2016.
“From the extremely low number of divestments that were forced due to noncompliance, it is safe to conclude that foreign investors are extremely well behaved,” Mr Pittar said. “The rate of noncompliance is so tiny as to be almost invisible. While estimates show that one in 20 wealthy Australians cheat on their taxes, fewer than one in 1,000 foreign investors cheat in the property market.”
[Analysis: Chinese money and Australian real estate]