There is no doubt the Australian property market has been one of the best performing in the world over the last decade but a number of issues have emerged which could challenge this status. Before we look at the market in more detail it is worth remembering that Australia was one of the few economies which managed to avoid recession in light of the 2007/8 worldwide economic downturn. So, what issues could emerge in the short to medium term to challenge the status of the Australian property market?
Attack on foreign investment in Australian property
Despite the fact reports have shown the influence of foreign investment in Australian real estate has been overplayed by politicians the subject has become something of a political football in recent times. As a consequence, federal charges for foreign investors together with increased stamp duty are starting to have an impact especially among Chinese real estate investors. A recent report suggested that Singapore real estate investors have become more prominent and with the Chinese government looking to control the level of funds leaving the country this is a pattern which could continue for some time to come. Even though restrictions and additional charges for foreign investment in Australian real estate have gone down well with the general public this could seriously backfire in the medium to long term.
We know from official statistics that many Chinese investors acquire property ahead of their children applying for further education and work experience in Australia. This is a pattern which has emerged across the world taking in the likes of Canada and the UK as two examples. The Australian government have made a number of changes to visa rules and we are likely to see more changes in the short to medium term. A slowing in migration will obviously reduce demand for property in the short term thereby potentially deflating property price bubbles dotted around the country. There is nothing wrong in deflating price bubbles but if this restriction in migration and investment continues in the long-term it will remove significant investment in Australian real estate.
Interest only mortgages
Recent figures confirm that government attempts to rein in the use of interest only mortgages, where capital is repaid at the end of the term, have succeeded to a certain extent. In the second quarter of 2017 only 30% of new mortgages were of the interest only variety which is a fall from the previous quarter of 36%. When you bear in mind that interest only mortgages are more commonly used by speculative investors this again could reduce foreign investment in Australia.
While many reports have downplayed the impact that foreign investment has on the Australian property market, it is an integral part of the market going forward and has grown in recent times. If this element of the market was somehow removed or diluted going forward, which seems to be the goal of the Australian government, this would obviously reduce competition amongst buyers and at best slowdown price appreciation. It is also worth remembering that it was essentially Chinese investors, who invested heavily in mining and natural resources in Australia, who kept the country from dipping into recession in light of the 2007/8 downturn.
Politicians seem to have short memories when it comes to overseas investors – will they live to regret their more aggressive stance of recent times?