In our regular series looking at global property investment, this month I give my perspective on how Australia’s property market has moved sharply away from welcoming foreign investors and how that has had serious repercussions.
In our recent blog looking at the cost of Stamp Duty around the world, we discussed which cities are the most expensive to live and buy property in. Having worked in the Australian property market for 10 years I have seen some big changes. Australia, specifically Sydney, is the world’s second most expensive property market where prices have risen by 75% in just five years. Melbourne has seen prices jumping nearly 16% in the past year, with Canberra now overtaking Sydney in terms of growth of house prices over the past year.
Low interest rates had been attracting buy-to-let investors (both domestic and foreign) but a housing shortage has forced the government to impose some unpleasant additional costs on buy-to-let buyers to calm the market. Costs such as: a stamp duty surcharge for foreign investors, a rise in the annual land tax on foreign homeowners (of 2% from 0.75%), an abolition of stamp duty concessions for off-plan properties (popular with foreign buyers) and high stamp duty rates of between 12% and 13% for foreign buyers. Images of Australia’s sun-drenched beaches and gleaming cities offer a vision of paradise, but it does come at a price.
The government and the banks’ stance on foreign investment has, in fact been pretty harsh. Banks have cut finance to foreign buyers, the government takes 20% withholding tax upfront on all profits made from sale of property and certain states have implemented annual land tax for ‘absentee’ landlords. Investors have to pay approx 2% of the land value annually which doesn’t sound too bad until you consider that land values have also risen. For example, land valued at AU$700k incurs an annual payment Au$14k and it has hit buyers hard.
If Business Insider is to be believed, Chinese property buyers (who make up about 80% of all foreign property buyers there) are turning their backs on Australia. Australian property searches are down by a third in the first three months of this year compared with the second quarter of 2016. Of course it isn’t just the Australian regulations that are off-putting, Beijing’s capital controls are an attempt to prevent the yuan from depreciating following record external investment last year. The controls restrict lending and the amount of money that can be moved from the mainland either by individuals or companies. However, that also limits the amount of the money flowing back into China from overseas investments.
There’s another reason why Chinese investors are hesitant about the Australian market – there have been warnings of an imminent crash. Swiss bank UBS noted that the property market there has peaked too quickly and that any move from the Australian central banks to increase rates could result in a crash. One Australian news piece notes what will happen in this event and how to lessen your losses: “If housing prices fall, say, 25 per cent, do you want to be stuck in the middle getting covered in blood and gore, or do you want to be off on one side, your hand covering your mouth in horror, saying ‘Ouch, that’s gotta hurt!’”.
The Australian market has attracted particular attention from investors because the property values rose so far, so fast. According to ABC Australia, between 2003 and 2009, the year-on-year average inflation was nearly 9%; mortgage finance was readily available and investors were able to access 50% deduction on capital gains tax which made property investment a no brainer. So it stands to reason that it is a ‘not if but when’ scenario for the property bubble to burst. It is a market that has been built on credit growth rather than equity growth. There is increasing mortgage stress from local Australians and Household debt to GDP is one of highest in the world at 190%. It means they won’t be able to service their loans if and when interest rates rise. As unpleasant as any property market depreciation is, for buy-to-let investors, it is always about the long game. Even if values fall, the property will continue to generate an income until the market picks up once more. How long that takes depends on the market.
For serious investors however, there are less expensive and much more stable world markets to consider. Many Chinese investors are looking at Thailand, Malaysia and Britain, but it is London that offers by far the best option. According to the Office for National Statistics, the average property price in London has risen steadily from £294,000 in January 2012 to £491,000 in January 2017. Even with the uncertainty surrounding Britain’s exit from Europe, London property continues to appreciate in value as the city attracts workers from all over the globe. The UK’s educational establishments hold the respect that comes from more than a century of world-class standards, it is little wonder that they draw thousands of students here every year. All of this means that London has is significant supply of tenants seeking high-end rental property in prime locations. London itself is a relatively inexpensive market, stamp duty is between 3% and 13% depending on property type, and most of all it offers stability. In short, it is an investor’s paradise.
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