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).
Our Response
Our ResponseWe 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.
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U r right Steve … we could be quite a hypocritical bunch cursing housing affordability on one hand while quietly
enjoying the equity growth benefit on the other :)
Absolutely! I’ve no problem with a foreign person paying a silly sum for my property, but I can’t stand seeing them buying all the local property and pushing prices up. Er, hello!?!
– Steve
Wondering if the pendulum now starts swinging back from capital growth extreme to the cash flow side …
It would have some distance to swing, if that were to happen!
Residential yields in Sydney and Melbourne are 2 to 3%, gross!
– Steve
Looking fwd to your MMC to get some expert insights and strategy going fwd!
I am keeping my eye out on this space. Though i am very confident on my ability to make money with property in a slightly declining or better economic environment. My education and knowledge is absent for what is required in a rapidly declining environment to continue succeeding as an active investor. Right now i continue the only plan i have and am reducing debt to zero.
Besides being cashed up for a turn in the property market i would love to hear any thoughts on what people are doing so as not to rely on a 9-5 job during hard economic times.
I always thought the best income accelerator was turning intellectual property into income via the internet, hence why I am such a fan of Derek Gehl.
He’s hopeless at pinball (and the board game Risk), but a master at turning ideas into income via the internet.
– Steve
Hi, yeah I am also doing what you are, working very hard and being smart with the money I make to reduce my homeloan debt ASAP, it will be a decision that is taking a lot of sacrifice now but will greatly benefit me in future and provide choice, power and freedom. Keep at it mate, all the best!!!
Can’t help but notice how much more my phone is ringing and inbox is filling with opportunities to buy – lots already with DA’s. Sign of a balanced moving to buyers market – Yay!!
This raises an interesting discussion topic, and that is the number of people who undertake developments on a buy high, sell higher strategy. That is, the development is not adding more perceived value then actual cost as such, but rather the movement in market price is leveraged by turning one property into many properties.
This strategy is okay in an up-trending market, but like all forms of leverage, when prices fall the result is compounded to the downside.
Hence the increase in the number of DA-approved sites coming up for sale where the assumed sale price is no longer realistic (without the foreign buyers) and therefore finance is not able to be obtained (or less finance available) and / or the overall risk to return is simply not there.
– Steve
Well I am an overseas owner, have been since 2001, But Not Chinese, I am a Kiwi !
I have been slugged with the new Land Tax Surcharge and have gone from being
slightly positive to way ,way negative. I was hopping to be able to get to 65 { 5yrs}
and then sell a property to clear debt and have some spare cashflow, But now it is not
able to happen? I find myself out of work on a $200 a week benefit due to MS and
a very negative Australian set of property due to Government theft! I will have to get out
asap! Thanks! So it is Not only the Chinese, You Guys can still buy here and we for now?
Still do not have stamp duty, capital Gains Tax, land Tax etc.
My understanding was that our Kiwi cousins were somewhat excused from the foreign purchaser smack downs.
From: https://www.sro.vic.gov.au/foreignpurchaser
Seems to me I’d be hunting down one of those Wonka golden (Subclass 444 Visa) tickets for my NZ passport, if I were you.
Regards,
– Steve
Interesting comments Steve. Your comments are directed at the middle to top end of the market. So how is the ‘foreign’ buyer effecting the price of property in the western suburbs of Melbourne or the huge increase in property from Cambletown to Gundagai along the Hume Highway? I highlight ‘foreign’. It may not be clear that this is not only the overseas buyers or resident as you have stated but it covers any person who has a primary foreign (being a non-Australian) source of income. So an Australian working overseas is classified as a ‘foreign’ buyer. As an Australian I fall into this classification so my ability to borrow in Australia has closed. Also the catch comes into PPR where you loose that right after being overseas for 5 + years.
I can tell you where my investment dollars are now going…….not into Australian IP’s.
As an Australian citizen now living and working in the USA (but with full intention to retire back to Australia in a few years) it was very disappointing to me that the Australian liberal party changed the tax laws around Australian property for LTCG removing the 50% discount unless you were living in Australia a few budgets ago.
Uhm sorry but you have got to be joking !!!
This basically means that 41c in every dollar of capital gains minimum goes to the ATO.
Thanks but no thanks.
Instead since this law was introduced our surplus investment dollars every month are going into investing in USA equities (and profiting the same long term gains as I would have in Sydney IP’s) instead we only pay 20c in the dollar LTCG.
We have no intention of selling our four existing IP’s but if you want to know where the buyers have gone….I know we are only a sample size of 2……but that’s where our dollars have gone and why we haven’t purchased any more.
Hi Steve, I really don’t know anything about that visa?
When I purchased we were treated the same except for the known fishhooks,stamp duty etc, but as far as I am aware they slapped the surcharge on all absentees even an Australian who is out of the country for 12 months or more? John
Good Morning, Great article on declining Real Estate values, and I agree 100%. but declining values are nothing new. Over history, booms and busts have been going on since real estate was invented. Our business has eliminated debt on our properties over the last year and we have good yields in place for the years ahead. We all know circumstances can change and no one can predict the future, but its time to knuckle down and wait for the buying opportunities that could present themselves in a year or so. I have two questions please. 1) How much property is tied up in Australian Super? 2) Are government departments cutting their own throats by declining Real Estate prices? ie: Less Land Tax, Less rates, Less Stamp duty, Establishment fees, etc, etc,etc. We are looking at a rocky road ahead, but long term common sense will prevail. Be patient, great opportunities in the future.
Hi Garry,
I’m not sure how much, but I suspect a lot and more and more as time goes on, especially after it became mainstream through SMSFs after the Telstra instalment sale.
Yes, it is most likely near-sighted to create policy to reduce prices as it will affect collection of other taxes. Still, that’s politics for you.
Regards,
Steve
Hi Steve, Thanks for the response. I read your book and attended your seminar in Melbourne about eight years ago. Both were very inspiring and put us on the property track. we are more, low number of properties, buy, hold and own for long term yields and growth. Yes, growth over the next few years will not be there, but opportunities to purchase, will be. Thanks for the seminar in Melbourne, it made a difference.
Hello again Steve, That visa is basically only for entering,living and working in Australia and yes buying houses, but the only way it seems to be able to avail yourself of not having to grease the palms of your white collar criminals is come over and residents? Which would be great, but not possible at this stage in my life.
I’m not sure about the hurdles you have to jump, but given the dollars involved, I’d be making an appointment with someone knowledgeable to see how to get the visa, even if you don’t ever get physically move to Australia.
Having just returned from a business trip to Fiji where a certain foreign nation imports not only their own labour but also the raw materials ( sand and cement) from their homeland to “invest” in the local economy I can only laugh at the intelligence of our leaders who have allowed China to drive housing prices to an unsustainable level in Australia
A median price in Box Hill of $ 1.8 m. Something is seriously wrong
Victoria will now have to look at how they will balance the books without the premium stamp duty tax they have been gouging from buyers either local or foreign
What is more concerning is we now have an exodus of buyers that were happy to pay over the odds to get their funds out of China but the criminals in the finance sector who have profiteered from liar loans are now law abiding lenders who are making it much harder to obtain finance
I have just purchased an IP in SE Melbourne ( with a twist) and funding is certainly tougher. As the Commission delves deeper, the hoops will not only increase in numbers but will reduce in diameter thereby reducing demand even further
We better hope and pray for another mining boom , because an economy that is based on artificial consumption ( housing) is not going to be pretty when the greater fool finds the music has stopped playing
I’m picking a 15 to 18 % drop in values over the next year or two. Shopping time !
Hi Steve, how long do you think this stagnating/slight dropping in property values phase will last? Do you think the minimum wage increase will have any effect at all or the new tax cuts that were planned for future in the release of the May budget? I feel interest rates could stay on hold till the end of the year but possibly rise by February 2019 as the economy has now had a 3.1% growth over the year as most recently reported, interest rates could even go up Q4 this year but unlikely in my opinion.
Typically in Australia flat and down period in real estate markets can last a few years. If interest rates rise though the initial fall could be sharper and quicker, followed by a subsequent lengthy but gradual downtrend.
On the other hand, State and Federal governments can reverse some of their recent policy, and even introduce new policies, that stimulate the market. This is happening in Vic right now with the unit market priced between $350k and $500k quite red hot for first home buyers whereas the multi-million dollar mansions are struggling without wealthy foreign buyers outbidding each other.
– Steve
Thanks, some good points made there, household debt levels are still some of the highest on record from what I most recently heard, the RBA would have to strongly take this into consideration when making a interest rate decision, perhaps market will cool till around 2020 then start to demonstrate upward growth again. Thanks again Steve.
Living through the Declining Value Trap here in Perth now and it can be brutal. My IP values are significantly less than they were 10yrs ago, and rents down 35% from peak. 1x close to city, cafe strip apartment and 1x close to beach ocean view apartment. Both areas have seen large increases in supply over the last few years, with developers now willing to discount deeply to try and move stock. Also looks like plenty of more supply to come moving forward thanks to density code changes a few years ago. The hidden killer though is the banks – my IO offset loans are now about to flip to P+I and I now won’t qualify to get them refinanced. Looks like I will have to sell into this market though just to stay afloat. Not a great outcome after 16 years in the market, though am coming to terms with “starting again” at almost 50 yrs old. To those in Sydney and Melbourne who have ridden the wave over the last 10 years – look to the west coast for an indication of what can happen next. Be mindful, push your numbers out further, and have a diversified portfolio that isn’t all property. (some buy and hold properties in different suburbs, investment in green acre development sites, as well as short term active developments still finds me at the mercy of the property market and the banks when things are heading south. Easy to see in reflection. I hope I can help at least one person to avoid ending up in my situation.
Thanks Darren.
Your contribution is among the bravest, most courageous and insightful posts I’ve ever read on this website.
– Steve
Hi Darren,
I can feel your pain.
Thank you for your honesty and important warnings.
Perth had been on the up because of Mining and it is on a down because of Mining.
There is talk about Mining coming back…perhaps not to the previous levels? Nevertheless commodities have turned. I am not sure if my idea would help?
If you decide to hang in there, perhaps you could look for private finance instead of banks?
I bet there are loads of fully or partially self funded retirees that would be happy to lend for just a couple of percent more than they are getting now…? Yes you have to find them and perhaps give them a Caveat over the property.
If you can get the Banks out of the loop..it might be possible. I do not think Perth can go much lower than it is at the moment. Should it do so we all be in trouble. I think it might turn quite soon…. my observation of other people’s opinion. Nobody seriously knows though.
I know that some people are looking at Perth to potentially invest in.
A arrangement could be reached with someone that is not cashed up enough to perhaps help fund the detachment from the banks and participate in the potential upside swing?
Steve normally would say to get out of non performing property.
If you would have to take a Serious Haircut though it might be a an option to just hang in there long enough to steady the ship and sail on into less scissor infested waters?
Keep us in the loop please. Stay positive and think straight and outside the square!
Hi Steve,
Will you be sharing some strategies for a trending down market at your MMC by any chance? Thanks!!!