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Are Foreign Buyers to Be Blamed for Making Australian Properties Unaffordable?

Foreign buyers are flooding into Australia’s housing market with cash and ‘the bank of mum and dad’. They appear to be outpacing local buyers who are grappling with high interest rates. Many are pointing fingers at these international players, accusing them of sending shockwaves through Australia’s housing market and exacerbating the unaffordability crisis.
However, is this accusation really warranted? As data-driven buyers’ agents and property researchers, the InvestorKit team believes the answer is a solid “No”.

Image for the article - Are Foreign Buyers to Be Blamed for Making Australian Properties Unaffordable?
Are Foreign Buyers to Be Blamed for Making Australian Properties Unaffordable?

Foreign buyers are flooding into Australia’s housing market with cash and ‘the bank of mum and dad’.

They appear to be outpacing local buyers who are grappling with high interest rates. Many are pointing fingers at these international players, accusing them of sending shockwaves through Australia’s housing market and exacerbating the unaffordability crisis.

However, is this accusation really warranted? As data-driven buyers’ agents and property researchers, the InvestorKit team believes the answer is a solid “No”.

 

Can 1.5% of all players in the market determine its direction?

Before we start pointing fingers, let’s examine the numbers. Foreign buyers constitute less than a measly 1.5% of the entire property buyer landscape in the year leading up to the March Quarter of 2023—take a peek at the chart below for proof. Sure, there was a time when their presence swelled to a whopping 8% of the buyer pie, but over the past five years, their influence has been kept below 2%.

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this fraction is akin to the sprinkle of icing on a cake, hardly capable of tipping the balance. The below chart shows that the number of foreign property buyers surged from 2013 to 2016, but Australia’s total dwelling value didn’t grow significantly during that period; In contrast, the COVID property boom (2020-2022) happened when there were the least foreign buyers.

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So, what’s really to blame for the high housing prices?

Supply shortage and a surge in local demand are the main reasons for Australia’s housing price surge.

Supply Shortage: There are less and less established housing available on the market, and there’s not enough new housing built.

a. Established supply has been shrinking relative to population size:

Australia’s population has been grown steadily over years, constantly adding demand to the housing market. However, the supply (properties for sale) is shrinking. The below chart shows that the number of listed properties for sale has been trending down since 2012. Back in 2011, you’d find almost 16 properties listed for every 1000 people; fast forward to today, and that number’s dwindled to a mere 8.2.

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But why is this happening? Well, homeowners are gripping their properties tighter and longer. An HtAG research shows that both houses’ and units’ hold periods have been trending up since over 10 years ago (below charts).

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It’s difficult to pinpoint exactly what has caused this extended holding period, but one thing, in our opinion, is clearly attributable: the rising transaction costs. For example, Stamp duty is now nearly 8 times what it was 30 years ago, while Australians’ average income has only tripled over this period.

 

b. Incoming supply cannot catch up with household formation, making the situation worse.

While established housing supplies fade away, the influx of new housing can barely keep up with the growing number of households sprouting up. According to a National Housing Finance and Investment Corporation (NHFIC) analysis, the number of housing supply additions will be lower than the number of newly formed households in the next 5 years (see below chart), which will make Australia’s housing supply shortage even worse.

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*Check our Australia’s Housing Supply Crunch Whitepaper for more analysis on Australia’s housing supply shortage!

 

On the other hand, housing demand is surging, not just from foreign buyers, but more from the locals.

Demand Surge: While population growth is boosted by robust overseas migration (big cities) and internal migration (smaller/regional cities), Australia’s average household size is shrinking, leading housing demand to explode.

a. Strong Recovery in Overseas Migration

Net overseas migration, the true engine behind population growth and the relentless housing demand, surged to a whopping 387k in the year ending December 2022, the highest level in over 20 years (below chart). Another 315k will come in FY2023-24, forecasted by Department of Home Affairs.

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The surge in overseas migration has led Australia’s population growth rate to climb to 1.9% in 2022, a feat not seen in decades.

The large number of overseas migrants is boosting housing demand in the biggest cities, especially Sydney and Melbourne, as they are the primary destination of most immigrants (Sydney receives 29.9%, and Melbourne receives 29.5% of the country’s net overseas migration).

b. Surge in Net Internal Migration towards Regional Australia.

While the housing demand in the big cities is boosted by overseas migrants, the demand in the regions is boosted by the surge in internal migration. Although regional Australia has been gaining internal migrant from the capital cities for decades, the inflow was relatively steady before 2020, maintaining a balance with new supplies. However, the pandemic caused a sudden climb in migrant numbers moving to the regions, significantly exceeding the housing supply regional areas have to offer and led to the housing crisis and price boom in the regions in recent years.

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c. Shrinking Household Size

While population is growing robustly, Australia’s household sizes have been largely trending down in the past 4 decades (below chart). The pandemic-fueled shift towards flexible work arrangements turbocharged this trend, sending the average household size tumbling below 2.5. Smaller household size combined with growing population is playing a significant role in Australia’s surging housing demand.

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Cracking the Code: It’s Not the Foreigners

So, let’s wrap it up: Australia’s housing affordability woes aren’t foreign buyers’ handiwork (whether they’re owner-occupiers or investors). Instead, it’s the homegrown demand spiralling out of control and a brutal supply shortage that’s stealing the spotlight. This is precisely why we’re betting on the Australian property market’s growth and diving right in.

But before you dive into just any property hoping for astronomical value growth, let’s get real. No one can guarantee that kind of magic. Yet, with thorough market research and due diligence, you can navigate the labyrinth and minimize your risks.

Meet InvestorKit—your compass in this property investment odyssey. We’re not just buyers’ agents; we’re the Sherlock Holmes of the property world, unveiling the right markets and properties through meticulous macro and micro research, data analysis, and due diligence. Our data-driven approach that has propelled countless clients to their investment dreams faster than they ever imagined. Ready to embark on this journey? Click here and secure your 45-minute FREE, no-obligation consultation!

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