This week Michael Yardney discusses foreign investors in the Australian Market. Sydney largest property developer, Meriton’s Harry Triguboff, estimates that in the last month or so Chinese buying has halved. And with Chinese and other Asian buyers buying over 80% of Sydney’s new apartments in recent years, this is a significant development with serious consequences.
Why have the Chinese stopped buying?
It’s likely to be a combination of the fact that it is becoming increasingly difficult to transfer money out of China and Australian banks having withdrawn the welcome mat for overseas buyers. And it won’t be helped by last week’s announcement that the National Australia Bank will join the other major banks and tighten lending criteria for Chinese buyers.
Earlier last week Westpac Bank and the other banks in its group – St George Bank, Bank of Melbourne and Bank SA, stopped lending to all foreign residential property buyers. In March ANZ Banking Group closed the door on some buyers wanting to invest in Australian real estate using overseas funds and also announced tougher rules for other borrowers to prevent fraud and money laundering. Our fourth big bank, Commonwealth Bank, has also cracked down on lending to foreign buyers by tightening rules on the source of income and increasing the size of deposits required.
The reluctance around lending to foreign buyers, who are largely from mainland China, is partly due to the difficulty of verifying their identity, income and assets. There are already many stories circulating of fraudulent mortgage applications from overseas investors overstating their income and assets.
Another issue is that some Chinese buyers were effectively paying no deposit on their Australian property purchases as they were borrowing the deposit from a Chinese bank before seeking a loan for the remainder from an Australian lender.
This comes at a time when the number of new apartments due to settle over the next two years has hit record highs in Australia’s capitals, further raising the risk that some buyers will not make good on their purchases. The volume of new apartments is approaching, and even exceeding, the average overall number of apartment sales (both new and established) in the past five years*.
- In Brisbane, the number of units due to settle in the next 12 months is now more than the average number of both new and established apartments sold each year.
- In Melbourne, the number of new apartments to be settled is neck-and-neck with the average overall sales figure.
The figures show the surge in settlements due is greatest in inner city CBD’s of both Melbourne and Brisbane
Some real concerns:
All this has created real concern in the property industry raising fears of a substantial price correction in the off the plan apartment markets in our CBD’s. As foreign investors can’t purchase established properties most bought off the plan properties underpinning many of the new developments we can see in the CBD’s of Melbourne Sydney and Brisbane. Some have put down 20% deposit, others a little more hoping to obtain funding for the balance of their purchase on completion of the project
Unfortunately, many of these investors will be disappointed as most local banks will now no longer lend them funds to complete their purchase, while other investors will find the value of their properties on completion will be significantly less than the contract price.
This means they will have to come up with more funds as banks will only lend on valuations, not on contract prices.
This will be exacerbated by the fact that some investors will have to offload their properties at any price they can get achieve and this will devalue the other properties in their complex. It’s likely some will hope to walk away from their contracts and lose their deposit, but developers have the right to on sell the units and sue the defaulting purchaser at for their loss. Coupled with the current looming oversupply of inner-city apartments, times look tough for these properties and it is likely that those who purchased off the plan will see no capital growth or rental growth for over a decade.
According to Michael Yardney, the decline in foreign buyer activity is likely to cause a significant downturn in the off the plan sub segment of our capital city property markets.
Author: Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.