Analyzing Foreign Investment's Impact on Australian Housing Market

This report provides a comprehensive analysis of the impact of foreign investment on the Australian residential real estate market. It begins with an introduction to the housing sector's importance and the increasing role of foreign investment, particularly from China. The report explores the background of foreign investment in Australia, including historical trends and current market dynamics, addressing the problem of rising property prices and decreased affordability. The literature review covers foreign investment trends, residential tourism, education, and migration's influence. The methodology section details the research approach, data collection, and analysis methods. The data analysis and discussion section examines housing occupancy, costs, and migration patterns. The report concludes with recommendations, limitations, and suggestions for future research, aiming to provide a clear understanding of foreign investment's influence on the Australian housing market and its implications for affordability and economic stability. The report uses data and analysis to demonstrate the correlation between foreign investment and housing prices in Australia and the impact on the local population.

Evaluating the Impact of Foreign Investment on
Australian Residential Real Estate Market

Abstract
This paper that has been prepared has the intention of creating an understanding of the
impact foreign investment has on the residential housing sector in Australia. In accordance
to this, the background of the paper has been provided in order to provide a brief idea
about foreign investment accordingly an idea about the residential housing sector in
Australia. The research question and the objectives of the paper have tried to point out the
areas with respect to which the research would move forward. The literature has provided
an idea about foreign investment and how it has impacted Australia in the housing sector
earlier. The elements that significantly have an impact has been addressed. The
methodology in the same way has provided an idea on the data that has been collected and
the analysis process that has been used. The outcome of the paper has been able to address
the fact that foreign investments do impact the housing sector and the paper would
extensively explain the degree to which the impact takes place.
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Table of Contents
Chapter 1: Introduction..........................................................................................................4
1.1 Background...................................................................................................................5
1.2 Problem statement........................................................................................................7
1.3 Aims and Objectives.....................................................................................................7
1.4 Research Questions......................................................................................................7
Chapter 2: Literature Review.................................................................................................8
2.1 Foreign Investment in Australia..............................................................................9
2.2 Development of Foreign Investment Trends..............................................................12
2.3 Residential Tourism....................................................................................................13
2.4 Education and Migration............................................................................................14
2.5 Established Factors.....................................................................................................15
2.6 Resolution to Traditional problems............................................................................16
2.7 Factors responsible for the growth of Residential area..............................................17
2.8 Problem Statement......................................................................................................17
2.9 Summary.....................................................................................................................18
Chapter 3: Research Methodology.......................................................................................19
3.1 Introduction................................................................................................................19
3.2 Choice of Methodology..............................................................................................19
3.3 Research Philosophy..................................................................................................20
3.4 Research Approach.....................................................................................................20
3.5 Research Design.........................................................................................................20
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3.6 Data Collection Process..............................................................................................21
3.7 Research Methods and data sources...........................................................................21
3.8 Ethics..........................................................................................................................22
3.9 Summary.....................................................................................................................22
Chapter 4: Data Analysis and Discussion............................................................................23
4.1 Introduction................................................................................................................23
4.2 Housing Occupancy and Costs...................................................................................23
4.3 Migration....................................................................................................................25
4.4 Estimated Resident Population...................................................................................28
4.5 Discussion...................................................................................................................30
Chapter 5: Conclusion, Limitation and Future Work...........................................................31
5.1 Conclusion..................................................................................................................31
5.2 Recommendations......................................................................................................32
5.3 Limitations..................................................................................................................33
5.4 Future Research..........................................................................................................33
Reference List......................................................................................................................34
Bibliography.........................................................................................................................41
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Chapter 1: Introduction
The housing sector is currently considered to an essential element in evaluating the
welfare of the economy of a country. Traditionally, the assessment of the housing market
has been easy as the dependence has been mainly on the balance of the national demand
and supply and it was examined specifically with the segregation of the other markets. In
the current time period, this process is of no use because of the fact that the global
characteristic of the market (Ferrero 2015). This explains that the previous process of
examining the market is of no use as the assessment of the market does not require the help
of the domestic factors and it is even seen that the domestic factors are even associated
with complexities and various issues. Therefore, in order to have an idea about the market,
it is essential to consider as a complicated economic environment that is effected by
several factors which are international and domestic in nature.
There exists an extensive relationship between the housing sector and the other
sectors like the financial and the labour sector, which makes it hard to assess in the
segregation. The interdependence was very much highlighted after the financial crisis took
place in the year 2008, when there had been a downfall of the housing market in several
countries. The downfall in the housing sector had significant amount of impact on the
overall economy of the countries and therefore this incident acts as an example in order to
address the significance of the housing markets (Jordà, Schularick and Taylor 2015). Their
authority to have an effect on the economies all over the globe should be taken into
consideration.
In the recent time period, there has been an observation that there has been a shift
within the capacity within which the customers participate within the housing market. In
the past intestates in the housing market was looked upon to be a long term asset. In the
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current time period, the purchase of the real estate is regarded as an investment and
therefore the national and the foreign investors have started showing significant amount of
interests as there has been a rise in the demand for house in distinct areas. The countries
that have developed economies, high standard of living and stabilised governments are
mostly targeted by the investors (Yunus 2015). The housing market gaining the features of
the financial markets has motivated the investors to undertake investments in this market
and the result has been observed in countries like Australia.
Due to the growth of foreign residents in Australia the residential housing market
has seen an increase in new residents participating in purchasing property. The purpose of
this article is to analyse the impact of foreign investment and affordability in the housing
market. The demand for residential housing is increasing with the expanding purchases
from foreign investors. The price of dwellings is also increasing due to the high demand.
Legislative laws are developed in Australia to promote local construction for the
development of dwelling houses (KPMG Economics, 2017). Residential projects are
purchased by foreign investors or domestic buyers. The GDP rate of Australia is increased
due to the foreign investment from various sources in the residential housing market which
contributes to better living conditions.
1.1 Background
Morano and Tajani (2017) explained that investors from China and the Chinese
migrants who have newly arrived undertakes an investment of around AUD 44 billion in
the residential real estate market of Australia within the year of 2014 to 2021. Shaw and
Hagemans (2015) addressed that most of the investments in the residential housing market
in Australia has been undertaken in Melbourne and Sydney. It is seen that approximately
14% in Melbourne and 18% in Sydney has been purchased by the foreigners. Therefore,
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this addressed that the foreign investors have kept a pressure on the housing prices within
the capital cities.
The housing prices in both the cities have been reasonably high and in the current
time period the prices have gone so up that it has become difficult for the local purchasers
to purchase a house. The rise in the level of interest from the Chinese investors has led to
the rise in the housing prices and the banks who are operational in the country have
indicated that this feature would lead to inflation in the prices of the property. The rise in
demand in the housing sector in Australia has mainly been due to the rise in income level
of the residents and therefore they have shown key interest in purchasing properties with
the help of which they can undertake investments and accordingly can maintain assets in
their financial portfolio as well (Cesa‐Bianchi, Cespedes and Rebucci 2015). These have
been the factors that have motivated the increased in foreign investments in the Australian
residential sector and accordingly have developed the housing market in the country.
The increasing demand of residential dwellings has resulted into the rise of price
which is around 7.25 % every year. An analysis of residential prices in the past decade of
capital cities of Australia found an average increase of 2.5% (Kohler and Van, 2015).The
performance of Australian investors is improving with the association and consideration of
immigrants in the Australian policy of real estate (Masron and Kepili, 2016). Foreign
residents are also participating in the process of purchasing the houses (Sharpnel, 2016).
Recent studies assist in providing information concluding that 10 to 20% of purchases of
dwellings is done by foreign investors. Population growth also increases the demand of
residential houses for both locals and immigrants.
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Figure 1: Average National house pricing growth (Kohler and Van, 2015)
1.2 Problem statement
The major problem that exists with housing investment is the increase in price of
dwellings due to the escalating demand from foreign residents. This has impacted on the
affordability of housing especially in the 1st home buyer market..
1.3 Aims and Objectives
The aim of the research program is to analyse the impact of foreign investment and
housing affordability in the residential real estate market. The research helps focus on the
factors which are responsible for the increasing demand of residential houses.
1.4 Research Questions
The research questions which are designed for undertaking the research on impact
of foreign investment are given below:
Q1. What is the impact of foreign investment on the growth of residential real estate?
Q2. Why are foreign investors interested in investing in residential dwellings?
Q3. Why there is a significant increase in the price of the dwellings?
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Chapter 2: Literature Review
There exists an extensive level of literature with respect to foreign investment, and
it is seen that the foreign investment has significant level of impact on the prices related to
housing. Aalbers and Christophers (2014) explained that the development of new middle
class people in the developing nations has raised the financial activities and the
development in the housing sector all over the globe. There have been several countries
that have been facing this issue and have experienced a rise in the foreign investment in
their market of real estate and therefore examining the processes in order to handle with
the outcome of such increase in the level of investment on the prices related to the houses.
Australia along with some other countries has been dealing with constant rise in the prices
of houses and there has been significant rise in the level on the level of investment through
the foreign entities (Song, George and Chen 2018). There have been several studies in
order to find the relationship between foreign investment and housing prices and the results
have concluded that these two variables have a positive relationship.
The issues and worries in relation to foreign investment and prices of housing all
over the globe have been discovered. One of the worries is the swift rise in the prices of the
houses and the rise would meet to a certain point when the person who is earning an
income equivalent to the national income would no longer have the ability to afford a
house (Shi et al. 2016). The residential income in the host nation in the current time period
is no longer the key driver in relation to the prices of housing in most of the urban cities.
The governments all over the globe are incorporating rules and regulations in order to
reduce these risks and issues and the effect of rise in the extent of foreign investment
within their national economies.
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2.1 Foreign Investment in Australia
There was a public survey that was undertaken by Fratzscher et al. (2018), the results
have indicated that residents of Sydney were worried about the extent of foreign
investment and to be more precise, they were worried about the Chinese investors, who
have been regarded to be most of the foreign investors in the market of housing. van den
Nouwelant et al. (2015) explained that this kind of response has been existent for a very
long time. They have stressed on the fact that the era of gold rush during the time of the
early 19th century within Australia had influenced and brought in a huge number of China
based immigrants. The utilisation of the foreign labour and capital on the land of Australia
at that point of time led to the creation of disputes with respect to land and therefore a
sentiment of Anti-Asian is still existent in the country which the government is still trying
to manage in the current time period. Conversely, the foreign investments that had taken
place in the industry of mining had a positive impact on the economy of Australia. In the
current time period, it is seen that China is still the highest Australian iron consumer and
consumer of different other mineral and ores. This issue from the public in relation to
foreign investment and specifically in the investments made by the Chinese in the real
estate sector had led to the development of more and more researches in order to have an
understanding of the relationship among the housing prices and the foreign investment in
the urban cities (Whittaker et al. 2015).
It is seen that in Australia, all kinds of foreign investments in the national real estate
sector needs to be assessed by the “Foreign Investment Review Board (FIRB)”. This
permits the government of Australia to maintain a well effective and structured measure
related to foreign investment in the market of real estate. There have been numerous
researches that have looked to assess the number of approvals given out by the FIRB and
the essential factors that have an impact on it. Davis et al. (2015) makes use of a fixed
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effects regression panel process in order to assess the impact of the foreign demand on the
national prices of housing. The research completes with the fact that there is a positive
relationship among the approvals of foreign investment and the prices of housing. The rise
in the extent of foreign demand in the area of housing in Australia is increased by the
nationals of China as it is seen that up to 70% of the permissions have been granted to
them. Milcheva and Zhu (2016) even made use of the regression technique of panel data in
order to assess the impact of foreign investment on the prices of housing in Melbourne and
Sydney. The results that have attained from their research explain that foreign investment
is the key factor that addresses the 20-30% transformations in the prices of housing in the
recent time period. The housing prices that is existent in Australia from the early 20th
century to the current time period has developed faster than the aggregate development in
the OECD nations over the same time frame.
There have been agreements that foreign investments have an impact on the
Australian housing market and there exists a debate whether it has an impact on a
particular part of the market or has an impact on the overall market. Sá, Towbin and
Wieladek (2014) recommended that when for the first time the purchasers of house enter
the market they are looking to purchase a complete, small and reasonable abode but it is
seen that the foreign investors have the tendency to look for luxurious houses and hence
the foreign investment is creating a concern for the first time house purchasers. There have
been other debates as well where it has been said that there is a spillage of the over impact
of the rising prices of the luxurious houses within the market with respect to the other kind
of houses. Zuo et al. (2017) have debated that there has been an underestimation of the
impact of the foreign investment on the prices of housing and the extent of stability in the
market of housing.
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A report that has been presented by Ribeiro et al. (2017) explains that the price of the
houses with respect to the income ratio in the country of Australia is increasing. There is a
worry for several factors. Firstly, the price of the houses being high to the income ratio
explains the fact that there would be a rise of unaffordable housing and this if blended with
the loose limitations towards the credit can lead to increased level of debts related to
household. The second scenario has been that increased level of ratio explains that the
national income is no longer the only driver of the prices of the housing. This conclusion
with the combination with the proof of the rise in the extent of foreign demands can create
the threat of the foreign economic shocks on the national economy (Stephan and Stephan
2016). By summarising the factors that have been explained earlier, this would indicate the
creation of a bubble for housing with the risk of impulsive corrections in the market.
The government of Australia is having trouble with respect to taking care and
managing their relationship with China in order to maintain the positive impacts of foreign
investment that is taking place in the mining industry and accordingly taking measures in
order to reduce the level of risks related to the bubble in the housing sector. This requires
for a balance which is evident in the previous transformations in the policy that have been
created in order to cool off the housing market. For instance, there are restrictions on the
kind of properties the foreigners and the citizens who are temporary can purchase, which
would restrict their options to the lands that have been constructed newly or have been
redeveloped (Mulliner, Malys and Maliene 2016). There is a stringent policy that was
incorporated in the country in the year 2015. This policy levied a fee of AUD $ 5000 over
the foreigners who were looking to apply for the purchase of a property in Australia.
Additionally to the fee that has been discussed, the foreign purchaser would have to pay
out an extra AUD $10,000 for every AUD $1 million in the property value if they have
intended to purchase.
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