Foreign Investment Impact on Real Estate

This assignment explores the multifaceted impact of foreign investment on real estate markets. It analyzes the role of international capital flows in driving property price fluctuations, examines the implications for economic growth and affordability, and investigates the policy responses aimed at mitigating potential downsides. The analysis draws upon academic research and empirical evidence to shed light on this complex issue.

Running head: FOREIGN INVESTMENT IMPACT ON AUSTRALIAN RESIDENTIAL
REAL ESTATE AND HOUYSING AFFORDABILITY
FOREIGN INVESTMENT IMPACT ON AUSTRALIAN RESIDENTIAL REAL ESTATE
MARKET AND HOUSING AFFORDABILITY
Name of the Student
Name of the University
Authors Note

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FOREIGN INVESTMENT IMPACT ON AUSTRALIA’S RESIDENTIAL REAL ESTATE
AND HOUSING AFFORDABILITY
Table of Contents
Introduction......................................................................................................................................3
Research Aim...................................................................................................................................4
Literature Review............................................................................................................................6
Research Design and Methods.......................................................................................................10
Summary........................................................................................................................................11
References......................................................................................................................................12

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Introduction
The objective of this research proposal is to analyze on whether foreign investment influence the
residential real estate market in Australia and housing affordability. Housing is considered as the
most vital asset that is owned by majority of the households of Australians. It is a huge
household wealth component and act as investment vehicle for the people in Australia. Huge
mortgages as well as business loans are secured against the Australians residential dwellings. It
has been noted from the recent study that residential real estate market contributes hugely to the
Gross Domestic Product (GDP) in Australia (Burke, 2012). The problem that arises from this
residential real estate market is that variation in residential property prices influences the
behavior of economic variables that includes household consumption in other goods and their
financial stability (Newton & Glackin, 2014). Over the past few decades, the residential prices
have risen by an average of 7 ¼ % each year. As a result, the residential real estate market has
reflected steady growth by around 3% each year since the year 1970. At the end of year 2000,
the prices of residence in Australia in relation to average income were recorded highest in the
globe. In addition, in the year 2011, the prices of residence accounted six times of the average
income of the households in Australia. However, this nation experiences real estate bubble
during this period. Furthermore, the increasing residential prices as well as low rate of interest
have stimulated the growth of the residential real estate market in this country (Wadud et al.,
2012). Despite bad economic conditions, the prices of residential property’s have increased
strongly due to support of government incentives and this supported in the real estate market
growth. In addition, foreign investment plays a vital role in strengthening the residential real
estate market in this country. This means that the demand as well as supply of housing in
Australia real estate market increased owing to foreign investment. However, this demand in

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FOREIGN INVESTMENT IMPACT ON AUSTRALIA’S RESIDENTIAL REAL ESTATE
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residential market generated several construction projects, created new opportunity for the
household to buy the property and increased employment in the nation. On the contrary, huge
foreign investment created problems of housing affordability (Agarwal et al., 2015). This means
that rise in prices of residence in Australia pushed domestic home purchasers out of residential
market and near about 10-20% of new housing are brought by foreigners. It has been opined by
Blomstrom (2014), foreign investment is considered as the main driver of causing housing
affordability problems to the low income households in Australia.
Recent study shows that the average price of residence has become equivalent to the average
earnings of people of seven years. There are few factors that contributes to the rise in residential
property includes-
 Higher credit availability owing to financial deregulation
 Low rate of interest since recessionary phase increased borrowing capacity because of
lower repayments
 Reducing supply of land by the Australian government
 Rising prices of average floor area of new dwellings by 53.8%.
 Reforms in tax structure adopted by the Australian government including capital gains
tax
 Restrictions imposed by the government on the land use or preventing for higher density
use of land
 Ageing population growth in Australia
Research Aim

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FOREIGN INVESTMENT IMPACT ON AUSTRALIA’S RESIDENTIAL REAL ESTATE
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The main aim of this research is to examine both long term as well short term impact of foreign
investment in Australia’s residential real estate market and housing affordability. This research
proposal also facilitates in clarifying few question that arises from this topic. These research
questions includes-
 Is there any significance of foreign investment in residential real estate market in
Australia?
Over the past few years, this nation has experienced huge inflow of capital into real
estate industry, specifically in residential real estate market. This directly raised
supply of new residence and thus adding benefits to real estate industry as well as
suppliers. On the contrary, it has been noted by some observers that foreign
investment in residential real estate market has led to rise in prices of housing mainly
for the first home purchasers (Newton & Glackin, 2014). As a result, it results in
decrease in housing affordability in this nation. In contrast, some observers have
commented that foreign investment has not much significance in Australian
residential real estate market and housing affordability as it accounted for around 5-
10% of national housing turnover value. in addition , they have also argued that
foreign investment does not cause market distortions for the first buyers as foreign
investors operates at various price brackets from them and purchases numerous kinds
of properties.
 Does foreign investment influence the activities of first purchasers in the residential real
estate market?
Recent study reflects that the overseas buyers basically facilitates in making residential
property’s more affordable as their investment in this industry enhances the economy. As

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foreign investment has resulted in rise in prices that are hugely influenced by migration
and hence supply of residence cannot meet the demand for it. In addition, high population
growth as well as low interest rate raised the housing prices and this affected the
activities of the first purchasers in the market (Lieser & Groh, 2013). Therefore, the
buyers could afford to buy the residence due to low income and as s result, they try to
shift to other places or invest in other sectors. This shows that foreign investment
adversely impacts on the first buyers activities. On the other hand, foreign investment
has some positive aspects that includes- providing huge job opportunities for the
unemployed that in turn boosted the economic growth of Australia.
 Does foreign investment in residential market improved its performance over the years?
Although foreign investment in residential real estate market has shown adverse impact
on first buyers, it has remained beneficial to this industry. As no restrictions are there for
the purchasers of new residence, the operators in this market attained huge benefit from
the foreign buyers (Lee et al., 2015). For example, highest number of purchase of
residence by foreign buyers was recorded in Victoria. This rise in sale of residence with
high price increased the profitability level of the suppliers. Moreover, it improved the
performance of real estate market in this nation.
Literature Review
It has been evident from few studies that the foreign investors actively participate in investing in
the residential real estate market since global financial crisis in 2008. It has been opined by
Moran (2012), the main reason behind rise in housing prices was the foreign investors. In the
year 2015, the prices of residence rose by 5%. In addition, the total sales of housing in Australian
real estate market that accounted for 16%, were given to the foreign purchasers. In the era of

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global liberalization, operators in real estate market attained benefits from foreign investment
that helped them in expanding their business globally. The main determinants that has been cited
for foreign investors interest on real estate industry was rising liquidity level , higher returns and
huge opportunities (Beracha & Wintoki, 2013). The trend that emerged after the financial crisis
in the year 2008 with the SWF (Sovereign Wealth Funds), organizations of wealth management,
private bankers and rich families moving into market activities of international property that
deserted corporate bankers.
Traditional determinants for which foreign investors invest in Australian residential real estate
market
The traditional determinants cited for which the foreign investors purchases from the residential
real estate market of Australia were-
 It was better fundamental for investment
 It provides huge opportunity for acquiring freehold property
 Foreign investors especially the Chinese investors attained higher yields from Australian
real estate market in comparison with property market of China
 They also have the ability to borrow from this real estate market of Australia
Therefore, all these determinants influenced foreign investors to invest in residential market of
Australia. As a result, foreign investment increased in the Australian residential real estate
market.
Impact of foreign investment in Australia’s residential real estate market and housing
affordability

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Foreign investment in Australia’s residential real estate sector has been a financial as well
political problem over the last few years. The sharp decline in rate of interest has been the crucial
driving factor that increased activities of foreign buyers and high-rise in prices (Liao et al.,
2015). The housing market in Sydney has been seen as the leading platform of capitals over last
three to five years. The prices of the housing have been rising strongly and this affected
affordability of first buyers. On the contrary, the real estate market of Australia has no
restrictions for purchasers of new housing and this became beneficial for the operators of the real
estate market. According to the latest data from Foreign Investment Review Board (FIRB), it
reflects that the contribution of the foreign investors in the real estate market activity is
minimum. This highlights that the foreign investment have little impact on the residential market
in Australia (Crowe et al., 2013). Recent study reflects that in the year 2013-2014, the FIRB
permitted 7195 applications by the foreign purchasers for buying home in Australia. Therefore, it
represented only 2.4% of established residence title transfers that had been registered during the
same period. On the other hand, the highest number of residence purchases by foreign purchasers
during this period with 3483 and this was followed by New South Wales. It has been noted from
recent study that overseas purchasers actually facilitates in making housing affordable as their
investment provides huge job opportunities to the unemployed persons in Australia and also
enhances the economic growth. In fact, the overseas buyers plays a crucial role in increasing the
supply of residence (Cesa‐Bianchi et al., 2015). It has been stated by Krause and Bitter (2012),
though the foreign investment contributed to rise in supply of housing, the rise in prices creates
difficulty for the first residence purchasers to break into real estate market. The price at which
the foreign investors tend to purchase the properties were not within the price range that local
purchasers afford to purchase.

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In addition, several other factors that drive the residential market demand in Australia includes-
 Migrants in this nation have disposable income when they enters the market and they
tries to participate in this real estate market than several unskilled migrants.
 Increasing rate of education visas also increased the demand for housing in Australia and
hence they tries to invest in properties
 Increased competition between mining and infrastructure sector for skilled workers as
well as materials limits the new housing supply and this raises housing demand in the
market.
It contradicts from the above analysis that foreign investment improves the performance of the
real estate market in Australia. Moreover, some economist says that increase in demand and lack
of housing supply is cited as another reason for increase in prices of high residence (Cecchetti &
Kharroubi, 2015). It has been noted from recent report that, foreign investment is not the main
factor that raises housing prices. There are numerous factors that throws huge impact on the
housing prices rather than foreign investment involves. These factors includes-
 Ageing population growth as well as high per capita income of this nation
 The ability of the Australians that brings out huge mortgages owing to larger access to
low-priced credit
 Scarce availability of the land and its high cost for development raises the housing prices
 Lower rate of interest that prevails in this country for over the past few years
 Activities and strength of this nation
 Stamp duty as well as arrangement of tax
 Regulations or policies imposed by the government of Australia and red tape

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Furthermore, it has been argued by the Reserve Bank of Australia (RBA) that low rate of interest
did not adversely affect on the housing price rather it raised attractiveness of domestic
investment in high yielding property and this outcomes in huge demand for the housing property
in real estate market (Beracha & Wintoki, 2013). Therefore, it is noted from the above fact that
foreign investment does not much significance in residential real estate market of Australia and
is not the main reason for creating housing affordability problem in the nation.
As opined by Burke (2012), the policy adopted by Australian government for foreign investment
in housing market aims in increasing the housing stock of this nation. The applications received
from the non residents for purchase of new residence are approved without any conditions, but in
case of established residence it is prohibited. It has been seen from the recent data, bulk of
approvals is usually approved for investment in new residence in contrast to existing residence.
This recommends that demand for new residence in other countries have been channeled into
rising supply of residence as intended (Blomstrom, 2015). It has been argued by some economist
that foreign demand has priced out first home purchasers. In recent decade, the level of demand
for new residence in foreign countries increased strongly. For example, the rising significance of
Chinese demand for residential real estate raises Australia’s exposure to the factors influencing
China. Furthermore, any variation to attractiveness in acquiring assets outside China impacts on
the international demand for residential property in Australia and this might have implications on
economic as well as financial condition in the country.
Research Design and Methods
In this study, the qualitative research has been used for evaluating whether foreign investment
has an impact on the residential real estate in Australia and housing affordability (Bath, 2012).

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For analyzing this impact, several methods have been applied that includes research philosophy,
data collection methods and sampling design.
Research philosophy
Research paradigm facilitates the researcher in classifying the research principle with respect to
the research topic. There are four types of research philosophy that includes- pragmatism,
positivism, realism and interpretivism.
Positivism philosophy refers to scientific data collection as well as positive facts that have been
recognized from the empirical data. This philosophy highlights on the society that functions
according to common laws. This philosophy helps the researcher to construe the information that
has been obtained by applying logic.
Realism philosophy relies upon the assumption the scientific approach based on the reality of
developmental activities.
Intrepretivism philosophy refers to social approach that ally with idealism and is implemented in
the research by via qualitative research. It mainly helps in interpreting the elements of research
as well as merge individual ideas for the particular research topic.
Pragmatism philosophy helps in assessing the theories of research in respect of practical
application.
In this research paper, positivism philosophy has been applied as it relates with collection of real
data that is mainly attained through observations (Armstrong-Taylor, 2016). It also highlights on
the society that works with respect to general laws. Moreover, it has been seen that positivism
philosophy helps in attaining correct outcome of this research.

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Research Method
There are mainly two types of research method- inductive and deductive. Deductive method
refers to an approach that survey on the theory as well as test the validity in specific situation.
This method deals with hypothesis testing with respect to secondary data. This method is
basically concerned with quantitative data.
Inductive approach concerns with qualitative data and utilizes observations in order to expand
common principles about the research topic. The researcher gathers information and then
explains the prototype for developing new theory.
In this case, the deductive approach has been used in order to assess the impact of foreign
investment on the residential real estate market of Australia and housing affordability
(Bouchouicha & Ftiti, 2012). This method benefits the researcher as it acquires less time in
completing the research. This method also helps in acquiring accurate outcome from this
research.
Data collection method
The data collected helps in revealing the genuineness of the research. There are two types of data
collection methods that involves- primary data and secondary data. Primary data is basically
collected from the surveys. Secondary data is mainly gathered from journals, magazines and
internet. Primary data is segmented into two types that includes- quantitative data and qualitative
data. Quantitative data are analyzed by using numerical as well as statistical inferences. It
basically presumes reliability and is categorized in respect of discrete data. Quantitative data is
collected through different methods that includes surveys, observations etc. Qualitative data
classifies the objects in terms of characteristics as well as properties.

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Secondary data including property database were used for conducting this research. In this
research, Quantitative research technique has been used with semi-structured interviews. The
aim of qualitative research is to examine the research topic through feedback as well discussions
with the respondents or stakeholders participating in the interview. The interview was mainly
taken to the stakeholders and foreign as well as domestic investors. This also helps in identifying
how the policies adopted by the Australian government affect foreign investment in residential
market of Australia. It also helps in evaluating the affect of nontraditional determinants on the
decision making of foreign investors (Adeniyi et al., 2012). In addition, Chinese investors were
the main participants for this interviews as they investment in this sector was huge over the
periods. The interview selection were mainly based on their involvement in this industry and in
respect of their seniority in decision making procedure. Moreover, the data collected were voice
recorded and transcribed.
Sampling design
Sampling method refers to the technique including total respondents taken from the total
population in a sample. The method used for this research is simple random sampling in order to
obtain accurate outcome. Simple random sampling refers to the samples, which are selected
randomly from huge population (Peter, Svejnar & Terrell, 2012). In this case, the operators as
well as purchasers are given equal chance to be chosen from huge population. Sample size of
100 respondents were taken from the total population those who are involved in this market. In
addition, the survey questionnaires was formed based on the operators experience in the real
estate market, foreign as well as domestic investors.
Summary

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From the above report, it can be analyzed that foreign investment throws less impact on the
Australia’s residential real estate market and housing affordability. In addition, a semi-structured
interview was mainly conducted in Australia for seeking accurate information in order to justify
this research topic. It has been noted from the above study that after the global financial crisis,
the real estate market of Australia has improved not only due to foreign investment but also
several other factors such as education visas etc.

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AND HOUSING AFFORDABILITY
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