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Written by Stefan Kostarelis

Earlier this month, housing finance figures from the Australian Bureau of Statistics (ABS) confirmed that actions taken by regulators and banks to dampen investor demand for property are having a noticeable impact.

In a press release, Real Estate Institute of Australia (REIA) President Malcolm Gunning noted that the value of housing investment decreased by 1 percent in April in trends, down 2.3 percent from a year ago and well below from its 2015 peak.

“Decreases were recorded in all states and territories except the Northern Territory which had an increase of 1.8 percent. Queensland and Western Australia had the largest decreases of 1 percent,” Gunning added.

Gunning’s observation is that the market is “adjusting”, which is in line with other experts that are predicting the correction rather than collapse of the Australian housing market.

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But there are signs that new regulations are also driving away Chinese investors, who have become a large slice of the housing market pie. If they walk away, it could make for a much harder correction than many are hoping for.

Reuters reports that after the New South Wales government had announced it was doubling the tax for foreign homebuyers earlier this month, Sydney-based real estate agent Shan Lin was hit with a barrage of calls from overseas.

Referring to his mostly Chinese-based investors, Lin said, “They [my clients] definitely feel the pressure. They say ‘Shan, look, I will not consider investing in Australia or investing in Sydney'”.

Reuters also spoke to Sutono Pratiknya, a Sydney-based sales consultant who said that the changes are a clear signal that his overseas investors are not welcome.

“We used to do five property tours a month, picking up a dozen investors from the airport and showing them our latest offering,” Pratiknya said. “Now, there’s nothing.”

Australia is not alone in introducing measures to cool heavy Chinese investment, but what makes Australia different is the speed and number of changes that have come into effect.

Victoria, New South Wales and Queensland – which contain the top three cities for Chinese investment, have all raised foreign buyer stamp duties in just over a year. On top of that, Australia’s biggest banks have ceased lending to overseas buyers and in the recent budget a “ghost tax” was introduced to penalise foreign investors that leave properties vacant.

To understand how big of a correction the Australian housing market may be facing, we can look to Vancouver.

As another city that is favoured by Chinese, Vancouver had a similar problem to Sydney and Melbourne in recent years. Surging house prices were putting homes out of local buyers’ reach; so taking a cue from Australia, Canada introduced a 15 percent tax on homes bought by foreign investors.

The resulting correction has been massive. News.com.au reports that in the four-month period from last August to the end of 2016, foreign investment in British Columbia – where Vancouver is located – dropped from 13 to four percent. As a consequence, house prices in Vancouver fell 18.9 percent in the one-year period spanning January 2016 to January 2017.

The one silver lining to the correction storm cloud brewing over Australia’s eastern capital cities is that Chinese investment in Melbourne, Sydney and Brisbane may shift to places like Adelaide and Perth.

Increased regulations in Melbourne Sydney and Brisbane – which are by far still the top three cities for Chinese investment – may make sense but those places could be throwing the baby out with the bathwater. A little regulation is good, but too much can be a bad thing.