Foreign investor headwinds to have major impact on real estate

In its Australian Housing Outlook 2016-19 report, released today, QBE LMI noted that overseas investors have been a key driver of demand for new dwellings, with some demand also flowing into the established home market.

While some banks and market commentators have downplayed the impact of foreign investors on the domestic real estate market, QBE LMI says the headwinds for foreign investors are expected to have “the greatest impact” on the new dwelling market, particularly the apartment sector, where substantial pre–sales are required for a project to obtain development finance for construction.

FIRB figures shown in the report reveal the extent of foreign investment in off-the-plan developments, which has increased from approximately $2 billion in 2010 to $28.7 billion in 2015.

“For those that have already purchased off-the-plan, it will become more difficult for foreign investors to settle, particularly if a lower loan-to-value ratio and potential lower valuation requires a significantly higher equity contribution by the purchaser. If there is an increase in apartments that do not settle, there is likely to be greater downward price pressure in the apartment market as these apartments are placed back onto the market for re-sale, most likely at a lower price,” the report noted.

The total value of overseas investment in residential property (which includes the entire value of buildings where 100 per cent of dwellings have been pre-approved for overseas buyers, although all of these may not have been taken up) surged ten-fold, from $6.09 billion in 2009/10 to $60.75 billion in 2014/15, according to the report.

QBE LMI is confident that FIRB approvals are likely to remain elevated for the remainder of this financial year, but highlights a number of forces coming into play that are seeing the number of overseas purchasers decline. These include slowing price growth and lower yields across Australian capital cities, tighter lending policies towards overseas borrowers and the introduction of surcharges on stamp duty for foreigners purchasing property in NSW, Victoria and Queensland.

“Tighter capital controls in China, a key source of foreign investment into Australia’s property market, may limit capital outflow and impact investor activity in Australian markets,” the report said.

The QBE commissioned BIS Shrapnel report, now in its 15th year, provides an annual overview of the Australian housing market and forecast movements in the median house price and median unit price over the next three years across each capital city as well as key regional centres. This is the first time the report has explored in more detail the role of investors and overseas buyers.

“It’s a fascinating time to be looking at the Australian residential property and mortgage market,” QBE LMI chief executive Phil White said.

“This year’s QBE Housing Outlook tells the story of supply and demand and the growing reliance on units, as opposed to houses, to meet the growing population demand. It raises timely questions about whether our dwelling commencements, especially in Sydney, will have us on track to meet short-, medium- and long-term population challenges,” he said.

“Prices are forecast to soften through the three years to 2019, which is likely to be positive for housing affordability.”

Fewer investors are now entering the market due to banks tightening lending criteria. In 2015/16 investors accounted for 44 per cent of all residential loans, compared to 51 per cent in 2014/15, according to the report.

Mr White expects that owner occupiers, including first home buyers, will be stepping in to pick up some of this opportunity in the market.

[Related: Lending standards will save us from property crash, says funder]