JLL debunk some foreign investment myths

JLL debunk some foreign investment myths

15 September 2017

Popular wisdom blames foreign property investors for a host of evils affecting Australia’s property markets, such as rising vacancy rates, rental shortages, and higher house prices. But are these claims more reality or myth?

The JLL report Assessing the impact of foreign ownership on residential markets takes on the challenge of putting three common claims to the test.

And here are the results…

Myth 1: Foreign investment leads to higher vacancy rates—DEBUNKED

Some people believe that foreign purchases are the cause for high vacancy rates in many cities assuming properties purchased by foreigners are likely to be left vacant.

But in cities such as Sydney and Melbourne, where foreign purchases are higher than in Perth and Brisbane, the vacancy rates were lower at 1.8% and 2.7%, respectively, compared with 6.4% in Perth and 3.6% in Brisbane at the end of 2016.

According to JLL, there is little evidence that foreign owners are more likely to leave their houses/apartments vacant compared with local owners.

By way of comparison, a JLL transaction survey of Asian buyers in London showed that 85 per cent intend to rent out their investment properties.

Rental yield is one of the two components used to calculate investors’ return. If the rent covers agent fees and maintenance costs — resulting in a positive net rent — both foreign and local investors would be more likely to put their properties on the leasing market for the additional return.

The vacancy rate, says JLL, is still the result of fundamental demand and supply.

Thus, they conclude that the volume of foreign purchases does not seem to be the determining factor that drives the vacancy rate.

Myth 2: Foreign investment erodes rental affordability—DEBUNKED

The median rent to income ratios in Sydney and Melbourne ranged between 25 per cent to 35 per cent.

Housing stress status is normally flagged if rental costs or housing costs, in general, exceed 30 per cent of household income.

JLL conclude that rental affordability is usually associated with other city issues, such as wealth distribution management and affordable housing supply for low-income households.

They propose that housing policy interventions need to take into account various aspects instead of focusing on only one area to alleviate the affordability issue.

Myth 3: Foreign investment erodes price affordability—TRUE

Most global city housing markets are considered affordable if the median house price to income ratio is 5 years or less.

In Sydney, the ratio is 12.2 years, while Melbournians work an average 9.5 years to earn the median house price.

According to JLL, both cities seem to suffer from the demand-supply imbalance, in which the demand level was pushed up by foreign investors.

Thus, they agree that foreign purchases do contribute to the erosion of housing affordability in many global cities.

They note, however, that the median house price to income ratio in Hong Kong is 18.1 years, despite that country having far fewer foreign property investors.

Hence, while foreign purchases do add to the demand for housing, local investors are still the major players in the residential market.

According to JLL, the key driver behind housing shortage and affordability is supply, not foreign investment. Targeted taxes and use of home-sharing platforms can encourage optimal use of cities’ residential stock.

In this regard, the report commends the recent measures introduced by the Australian government that tax properties owned by foreign investors that are vacant for six months or more in a year.

The capital gains tax withholding threshold for foreign tax residents will also be reduced from $2m to $0.75m and the withholding rate raised from 10 per cent to 12.5 per cent.

Conclusion

So in conclusion, there certainly is a lot of debate around foreign investment and its effect on housing affordability. JLL have compared the myths versus the reality. Here’s a summary:

Myth 1: Foreign investment leads to higher vacancy rates—DEBUNKED

Myth 2: Foreign investment erodes rental affordability—DEBUNKED

Myth 3: Foreign investment erodes price affordability—TRUE