Foreign investment in the Australian residential property market is vital for the continued health of our economy.

Like all other areas of the economy, Australia relies on imported capital to make the wheels go round and sustain our standard of living.

It is accepted that mining and manufacturing would not exist without foreign investment but foreign ownership of homes has been getting some bad press over the past few years and it isn’t deserved.

Building homes is good for the economy. The construction industry is the fourth largest contributor to Gross Domestic Product (GDP) in the Australian economy and plays a major role in determining economic growth. The construction industry accounted for 6.8% of GDP in 2008-09 and employs almost 1 million people or 9.1% of the Australian workforce, making it Australia’s fourth largest industry (ABS 2010)

The latest ABS statistics also show residential building contributed $42.9 billion to the economy in 2008-2009 – this is good news no matter where the funding or buyers come from because it puts wages in our pockets and a roof over our heads.

In addition, the residential market is a significant source of retail turnover as we stock our houses with new furniture and white goods.
However, when the capital to build some of the houses and apartments comes from offshore – particularly when it is focused on high-profile apartment developments – it attracts headlines.
A recent story in The Age pointed to “Asian” buyers emerging as significant developers in Melbourne’s apartment market “as local developers struggle with onerous banking requirements”.

The story stated that mainland Chinese developers are behind nine landmark city purchases in the past 18 months, with “Malaysian, Singaporean and Indian” developers snapping up at least another four sites.

It rightly pointed out that Asian investors are filling a construction gap on the city’s apartment skyline created when the banks tightened credit restrictions and stopped lending to local developers. Asia has the money today. Not that long ago it was Europe, and before that it was the Japanese in the 1980s. It is all part of the cycle.

Fortunately, as we are one of the world’s most stable and open economies, foreign companies are happy to invest their savings in Australia to boost our economy and create the jobs that maintain our standard of living.

At the same time the Federal Government is ensuring there is no investment imbalance in the economy with the Foreign Investment Review Board (FIRB) ensuring foreign investors can only buy new housing and non-residents must sell their homes when they leave the country permanently.

These rules are a win-win for Australia as they allow foreign capital into Australia but retain ownership of the property here. Offshore buyers cannot purchase more than 50% of any new apartment towers and can only buy new homes. This means that without local buyers, these towers cannot be built.

Foreign investors provide Australia with a steady flow of capital to build the homes we require and, as a result of foreign preferences, actually encourages urban consolidation due to their appetite for apartment living.

Nor is there any indication they are influencing the prices in the undersupplied growth areas market. Sales to offshore buyers are rare and are concentrated in a few particular areas. The vast majority of “foreign” buyers in the growth areas are recent migrants building new homes and new lives, and enriching Australia.

Fears that the Australian property market was being over-run by offshore investment in 2008-2009 after the Rudd Government liberalised investment laws have been allayed by the return to the FIRB policy.

Ironically, the laws that were toughened up by the former Prime Minister to ensure “working families are not being priced out of their own family homes” did nothing to contribute to affordability.

If foreign investors had been the source of price rises then house prices should have stagnated, or even fallen after early 2010 when the laws were tightened again but this has not been the case.

The stimulus for first home buyers provided by both the State and Federal Government was probably the single most significant contributor to the rise in house prices. The collapse of the equities market has made residential investment the current safe haven for capital. This is being reflected in the apartment boom and sustained high prices – all fuelled by our strong economy.

This is the real reason Australia is quoted by some as having the least affordable housing in the world.

High housing prices are not the result of foreign investment but a failure of government policy to provide sufficient land for development coupled with a period of high levels of migration that put pressure on housing stock nationally.

At the same time the market was artificially “stimulated” to fuel consumption and provide “affordability” for first homebuyers.
The Victorian population rose by 116,250 in 2009, this projects a need for an additional 600,000 dwellings in Melbourne over the 20 years, with 284,000 of that growth to be accommodated in the growth areas.

This lack of supply in the housing market is not only sustaining high property prices but rents too, and new research from RP Data says the situation will worsen over the next 12 months.
It has found that rents in capital cities rose 4.2 per cent in 2010 and are forecasting an increase in rents for both houses and units of as much as 7 per cent this year.

Supply and demand are the cornerstone of every free market economy and in a period of short supply, commodity prices will rise.
Foreign investment will help to rebalance the market and lead to reduced rents and increased affordability.