Economic and Investment Update – March 2014 Doing a Bradbury

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Property prices

This article originally published in The Northern Daily Leader on 15 March 2014.

One of the big stories in the press last week was the apparent rush of overseas buyers into the Australian property market. Specifically, cashed-up buyers from China and other Asian countries were accused of driving up prices in the mid-range property price bracket – this is largely in Sydney of course, where a mid-range property costs a substantial $550,000 to $750,000. Newspaper articles complained that the influx of money from Asia was leading to excessive price growth, squeezing first-home owners out of the market and generally impacting any Australian looking to buy a home. There is some truth to the story, as there is little doubt that there is substantial overseas interest in owning property in Australia, again more likely in Sydney than elsewhere in the country. And in many ways it makes sense: if you are a wealthy Chinese citizen (for example), it’s probably prudent for you to consider shifting a portion of your assets offshore. China is still largely a totalitarian state where the rules of law are entirely at the whim of a select few. The robust democratic debate which we take for granted in Australia is completely absent in China and getting on the wrong side of the authorities can mean the loss of your life, never mind your wealth.

This trend of foreign property ownership is not unique to Australia – for some years now a similar relationship has existed between wealthy Russian citizens and property in London. Worried about the general lack of rule of law, wealthy Russians (and others from some of the more shaky Eastern European nations) have been heavy buyers of property in London. In the 12 months to June 2013 nearly 10% of all London property sales worth more than 2 million pounds involved Russian buyers. Canada too has been a destination of choice for wealthy Asians seeking to convert a portion of their wealth into bricks and mortar in a politically and economically stable country. The reality is that as a small country, Australia is reliant on inflows of foreign capital to maintain our living standards. Every $500,000 property purchase by a Chinese buyer involves the transfer of a certain amount of foreign capital from China (usually) and into Australia. A simplistic way of looking at it is that for each $500,000 brought into the country in this manner, the nation as a whole is $500,000 better off. Multiply this amount by 5,000 transactions and it soon starts to add up. The real blame for overly expensive housing lies with state and local governments who have an incentive to keep prices high through limiting supply (higher stamp duty and local rates), but that’s a story for another day.