Where Have All the Foreign Golden Property Geese Gone?
It seems now that Melbourne and Sydney property markets are declining, the media has finally woken up to what the rest of the country has been feeling for some time – that the glory days of the property market have now passed.
In fact, the speed at which apoplectic articles are appearing forecasting ‘Houseageddon’ just demonstrates that sensational doom and gloom headlines capture attention.
The cause of a cooling property market has nothing to do with an aligning of the stars, nor evil spirits demanding appeasement. In fact, it is nothing more than exactly what we asked for, so no-one should be surprised that a cooling property market and falling prices is what we’ve got.
An Inconvenient Truth
You see, for a long time now, many have been bemoaning the scourge of unaffordable housing, while at the same time happily profiting from what rising house prices have done to the economy broadly (i.e. jobs, jobs, jobs), and personally too if you owned real estate by increasing your personal wealth.
While house prices increased we were happy to turn a blind eye, at least for a while, to those silly foreign buyers paying extraordinary sums of money for off-the-plan concrete boxes in the sky, or overpriced houses in the ‘burbs. In fact, at auctions around the country sellers were praying for one or two such foreign ‘golden goose’ buyers to turn up to turbo-charge the bidding and swell the sales price.
But several months ago the State and Federal Governments called ‘time’ on welcoming foreign property buyers, and in fact deliberately enacted disincentives to keep them away, such as higher stamp duties and land taxes for foreigners, as well as penalties for leaving a property vacant, and, for good measure, no more capital gains tax discounts either.
Is it a surprise then that the foreign buyers, many of them Chinese, are now looking to other more welcoming markets? According to the Foreign Investment Review Board annual report, the value of residential approvals in 2015-16 was $72 billion. That fell to just $25 billion in 2016-17. With a two-thirds decline in foreign buyer activity, it seems the geese may have flown to greener pastures in Thailand, Vietnam and Malaysia.
Declining Value Trap
Should we care? Well, with real estate headwinds strengthening in the form of higher interest rates, increased difficulty in qualifying for a loan, and very conservative valuations, I’d say we should.
The big problem I foresee is apartments that were originally built for the overseas market, and, with those buyers all but dried right up, the onus falls back on to local buyers to provide the demand for an already over-supplied space. Watch for substantial price declines in such property that could create a broader declining value trap (DVT).
A property DVT occurs when prices fall, resulting in lower than expected valuations underpinning new and refinanced loans. Lower valuations trigger a dual response. First, buyers will have to cough up more cash to settle their purchases. Second, with fewer buyers, developers will discount their prices to move their stock which will only place more downward pressure on valuations, hence property values get caught in a down-spiralling value trap.
Hope On The Horizon?
At the moment the only bright spot on the horizon is a Labor policy (remember, Labor aren’t in government) proposing a new scheme that kind of sounds like NRAS, but somehow isn’t. In any event, that is yesterday’s solution to tomorrow’s problem because it targets supply; today’s problem is demand (or, more accurately, a lack thereof).
We seem to have two choices:
First – cheer on falling property prices. The winners will be buyers, and politicians spruiking more affordable houses. The losers will be sellers, and politicians concerned about jobs. The danger here is that if the property market gets the sniffles, the economy catches a cold.
Second – wind back the disincentives for foreign buyers and welcome back the golden geese. The danger here is that property prices start to rapidly increase again.
So… what’s it to be? Falling prices, a softer economy, and more affordable houses, or rising prices, a stronger economy, and less affordable houses?
Only time will tell, but at the moment all the indicators point to continued soft property prices and a shortage of foreign golden goose on the real estate menu.