Are foreign investors really to blame for Australia’s high house prices?
Published 7:24 am 2 Nov 2018
Do you want to know what the impact foreign investment has had on the Australian property market in recent years? DG Institute Founder and CEO, Dominique Grubisa answers what impact foreign investment has had, what it means for you, and what you should be doing about that right now.
People talk about foreign investment ruining everything for them. They often say, oh, the market is so hot, the market is too expensive, property prices have gone through the roof, and I’m priced out of the market, because of all the foreigners coming here. The fact is that it’s not foreign investors who’ve done that. The media has beat that up out of proportion.
In fact, we have very little foreign investment in Australia, relative to other countries, and the fact that we’ve had such a boom in our market has very little to do with foreign investors. We can tell ourselves that as an excuse, and that’s what people have tended to do, but at the end of the day, our rising market, especially in the eastern states, in Sydney and Melbourne, in recent years, has been because of low interest rates, and pretty easy credit, and people needing to put their money somewhere. That has driven our market.
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Our market had been quite flat, so if we look at it from this point of view, and everybody always says the Australian property market, traditionally, if we’re looking at trend lines, it doubles in value every seven to 10 years. That has been the historical trend. But we didn’t have that growth leading up to the recent price rises that we’ve seen from 2014, or so onward.
So we had a lot of catching up to do, and we’ve had remarkable growth, but we’re really just on trend of where we should’ve been. And the reason prices went up, when you look at the economic basics, is because we’ve never, ever had interest rates this low in Australia, ever.
Since records were kept, we’ve never had rates this low for this long a period of time. So interest rates are the price of money. They’re the cost when you want to borrow money, and they’re the reward for saving money.
Think about it, if I’ve got a pot of money, and I’m saving it, I can put it in the bank, in a term deposit, and get two percent, but the yield isn’t very good. I’m not being rewarded for my savings.
If the interest rates are low, and investors aren’t being rewarded, what’s going to happen is they’re going to look for yield, or return, somewhere else. They’re wanting their money to get them greater benefit, and if they can take that pot of money, and borrow some more money, really cheaply, like four percent, and add it to it, and then buy a property that’s going to go up in value 10%, then it’s a no-brainer.
A lot of money has flooded into property because of that, and people make the excuse that it’s foreign investors, but it’s just basic fundamentals of economics. Low price of money, and pent-up demands that hasn’t gone anywhere for 10 years, so the supply is limited, and suddenly the flood gates have opened, and we’ve all come into the market, competing for limited supply.
But markets are really clever. What a market does is it says, well, hang on a minute, prices are going up, and people are buying, so developers and other people come into the market and say, we’re going to provide what people want, that’s what entrepreneurs do, and they see an opportunity to make profit, and markets level out again.
What you need to know about property markets:
1) We’ll never change markets.
Markets are always cyclical. They’re going to go up and down all the time, and it’s not a question of timing the market right, it’s a question of understanding the market.
2) There will always be a strategy for any market.
Markets are neither good nor bad, they just do what they do. The secret is to understand the facts. What is the market doing, and what is my response to that.
Right now, that the market’s flatter, that we’ve built up a head of steam, and everyone else is blaming foreign investors, and all sorts of outside forces, doesn’t really matter what’s caused it. At the end of the day, the market has gone up, and now it’s leveling out.
The reason it’s leveling out is not because, people say, oh, the foreign investors have all gone, it’s actually because credit standards have tightened. We’ve got a banking Royal Commission, and we’ve also got, right now, APRA, the Australian Prudential Regulation Authority, they’re the ones that control credit, how banks lend in Australia, they’ve changed the policies around residential lending. So they’ve strangled that off.
It’s not as easy to get loans as an investor, and banks have independently made interest rates higher on investment loans. People aren’t qualifying for loans. If they’re not getting credit, then they’re not buying. What do you do in a market like that? You don’t blame foreign investors, you don’t worry about what nor why, you look at the fundamentals.
A level market, a flatter market, means we’ve got to roll up our sleeves, and we’ve got to have strategies for manufacturing profit. We can’t just come in and ride the market, and wait for prices to go up, we have to add our own value, and our own profits, and there are ways that we can do that. It’s all a question of understanding the market, knowing what to do, rolling up our sleeves, and taking that leap to profit in any property market.
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