If 2014 was the year of the foreign investor, expect 2015 to be the year of the expat returning to the property market. Having given up on Aussie housing in 2014, due somewhat to inflated property prices but mainly because of the high Australian Dollar (AUD) throughout the year, expats are now set to re-enter the Australian property market as the Aussie dollar sinks to new lows.
Whilst local house prices have risen steadily in Sydney and Melbourne for the past 2 years, when priced in USD, Pounds or Euro, adjusted housing costs have not risen at all in real terms for expats. The latest fall in the Aussie dollar, bringing it into the very low 80’s against the USD, has more than offset any Australian housing price rises for those living abroad being paid in any of the major world currencies.
One interesting point about the apparent ‘property bubble’ in Australia is that the recent price rises have been confined mainly to Sydney and Melbourne. Overall, when viewed through the eyes of an expat, Australian housing has actually dropped in price outside the Sydney and Melbourne markets.
A return of expats to the market will offer some support to house prices, which are no doubt going to be pressure on many fronts. Unemployment is rising, condifidence is wobbly, rents have fallen away and many buyers are fatigued at watching house prices go up in consecutive years.
The short term future
There are contradictory arguments on how our property market will perform in 2015. Some experts are predicting another strong performance while others are forecasting a price correction.
Interest rates are now tipped to fall further, which would push the AUD even lower again, in the hope of stimulating confidence in the broader economy. An even lower AUD should see foreign investor’s money continue to flow into the property market.
Expats have not seen Aussie housing this affordable since the GFC when the AUD hit $0.625 against the USD in late 2008. Since then, the dollar reached a peak of $1.10 and spent two years at or above parity. While the AUD sat at these elevated levels, it terminated expat interest in Aussie housing.
The Reserve Bank of Australia (RBA) continually talked the AUD down throughout 2014 to the point where it now seems we are set to see sub $0.80 against the USD. If the dollar does settle below $0.80, expats will be tempted to re-enter the market. While the dollar was falling from $1.10 to $0.85, expat buying was muted. But there is a point at which buying Australian houses becomes compelling for an expat. The lower the AUD goes, the more likely we are to see expat buying.
Another subtle point in this equation is that while the employment sector in many other countries is improving, Australia’s unemployment rate is getting worse. After hitting a 12 year high in 2014, there may be a strong incentive for talent to head out on a working overseas holiday to take advantage of stronger incomes abroad.
Debate has been raging in Australia as to whether overseas investors have bought and are continuing to buy established housing, which contravenes Foreign Investment Review Board (FIRB) regulations. If foreign investors are flaunting the rules, to what degree has this impacted on domestic house
Different FIRB rules apply to ‘existing’ and ‘new’ housing stock. Foreign investors are entitled to purchase brand new developer stock without restriction. Unfortunately, a lot of this new development housing which was built to be affordable stock for first home buyers, has been bought by foreign investors. This put pressure on the prices first home buyers paid in an unintended shrinking supply of first home buyer stock. Further drops in the AUD will only make this situation worse for first home buyers.
First Home Buyers
First home buyers are therefore the true victims of this booming market. Given the likelihood of an even lower Aussie dollar next year, the story for first home buyers is unlikely to improve in 2015. First home buyer incentives were put in place not only to assist first home buyers financially, but also to encourage developers to build more stock. In reality though, developers have been more likely to sell to foreign investors than first home buyers because of the better prices they offer. Investors Rents have dropped and prices have risen. The end result is that yields dropped from about 4 or 5% net in 2012, to under 2% in 2014. This destruction of returns on property investment has caused investors to be wary of buying, particularly at the top end of the market. Any investment play is now more likely to become reliant upon capital growth rather than yield. But most of the capital growth has already occurred in the last two years, so where to from here for the overseas investor? With interest rates at record lows, housing at these prices is quite simply more appealing to home buyers rather than investors. Investors have been mostly outbid by emotional home buyers for the best part of the last 18 months and this looks set to continue throughout 2015.
Baby boomers are now consolidating their affairs as they transition to retirement. The recent strong market has seen an increasing number of baby boomers sell down their real estate holdings. Whether it’s downsizing from a large family home or unloading some of their investment properties, there is little doubt that the movement of wealth by baby boomers is going to continue to impact the market in 2015. Boomers have not only shown a panache for selling. They have also been enthusiastic buyers of luxury apartments. Apartments with water views, close to amenities, the CBD and Harbour have been in growing demand.
The key for home buyers to continue to support house prices is confidence. Confidence in their employment, confidence that the real estate market will continue to rise (or at least not fall), confidence that interest rates will remain low and confidence in the broader economy.
If home buyers can remain broadly confident overall, positive sentiment toward housing will remain. This would then make home buyers the largest single determining factor of the housing market’s fortunes in 2015.
Based on an article written by Peter O’Malley.