Foreign investment tumbles in Australian residential real estate

The number of approvals for foreign purchases of residential property fell in the first quarter of FY24, according to the latest statistics released by the Foreign Investment Review Board (FIRB). China remains our biggest source of residential investment, followed by India and Hong Kong.

The FIRB approved 1,374 applications from foreign residents to buy residential real estate between 1 July and 30 September 2023 (1Q FY24). This represented $1.5 billion in investment. This is significantly lower than the previous quarter and is tracking well below the rate of investment in 2023. Between 1 April and 30 June 2023 (4Q FY23), the FIRB approved 1,932 applications worth $2.4 billion. For the full financial year of 2023, 6,576 proposals were approved, thereby averaging 1,644 per quarter.

In 1Q FY24, China was the largest source of approved residential real estate investment with 523 approvals worth $700 million. Making up the top three were India with 148 approvals worth $100 million, and Hong Kong with 111 approvals also worth $100 million.

The fall comes amid the Federal Treasurer Jim Chalmers introducing legislation into the Parliament earlier this month to significantly raise foreign investment application fees, as per his announcement in the Mid-Year Economic and Fiscal Outlook. Currently, foreign investment application fees start at $14,100 for purchases of residential property worth $1 million or less, and rise to a maximum of $1,119,100 for acquisitions worth more than $40 million.

The Albanese Government wants to triple the fees for the purchase of established homes, which foreigners are allowed to buy if they are living in Australia to work or study, and must sell when they leave. Dr Chalmers explained that the government hopes this will encourage foreigners to buy new property instead. “This will help create additional housing stock, jobs in the construction industry and support economic growth,” he said.

The government also wants to double the vacancy fee charged to foreign owners whose properties are not genuinely occupied as a residence either by themselves or a relative, and are not rented out on a lease term of more than 30 days for at least six months of the year. The vacancy fee is the same as the applicable application fee in each case, hence $14,100 on properties purchased for $1 million or less.

On Census night 2021, more than one million homes in Australia were unoccupied, which created fierce national debate about home ownership affordability and rental supply for Australians. “The increased vacancy fees will encourage foreign investors to make their unused properties available to renters,” Dr Chalmers said. The government is also proposing a reduction in application fees for build-to-rent projects to encourage more foreign investment in this emerging real estate sector.

“Higher fees for the purchase of established homes and increased penalties for those that leave properties vacant will help ensure foreign investment in residential property is in our national interest,” Dr Chalmers said.

FIRB application fees were first introduced in 2015. They are indexed to annual inflation but have been increased markedly several times by governments in response to public discourse over the impact of foreign investment on rising property prices. Real estate industry insiders say rising fees are dissuading some foreign nationals from investing here.

The Reserve Bank had little choice but to raise interest rates again this week.

Inflation was already proving stubborn before the latest Middle East instability added further pressure to energy prices and supply chains.

Housing inflation alone has averaged six per cent over the past year, remaining one of the single biggest contributors to CPI.

But while the focus remains on rates, the deeper problem is structural and far more dangerous.

Australia is not building enough homes, and the conditions required to fix that are deteriorating simultaneously.

Construction costs remain elevated. Builders are increasingly unwilling to absorb contract risk. Labour shortages persist.

Capital is becoming more expensive. And as borrowing capacity weakens and sentiment softens, fewer projects are becoming financially viable.

The result is a self-reinforcing cycle.

The RBA raises rates to fight inflation. Higher rates reduce development feasibility. Fewer projects start. Housing supply tightens further. Rents rise. Inflation persists. The RBA raises rates again.

The only long-term solution is supply, yet Australia remains nowhere near the National Housing Accord target of 240,000 new dwellings a year.

Completion continues to lag approvals, meaning many projects approved on paper are simply never making it out of the ground.

That gap matters enormously because housing is not just another sector of the economy.

Around two-thirds of Australian household wealth is tied to property, while the sector underpins millions of jobs and related industries. Weakness here quickly spreads beyond real estate.

We are already seeing signs of stress. Auction clearance rates in Sydney and Melbourne have softened, borrowing capacity has declined, and parts of the market are experiencing price corrections as confidence weakens.

At the same time, policymakers continue to debate tax measures such as changes to negative gearing and capital gains tax discounts, despite fears that such reforms could drive private capital out of the rental market at precisely the moment when supply is most constrained.

This is the paradox at the centre of Australia’s housing crisis.

Demand for property remains extraordinarily high, yet the economic conditions required to actually build new housing are worsening.

The Reserve Bank cannot solve that problem alone.

Monetary policy cannot accelerate planning approvals, reduce construction costs or create more tradies. It can only raise the cost of money until something eventually breaks.

And increasingly, that “something” looks like the development pipeline itself.

Paul Miron is the Co-Founder & Fund Manager of Msquared Capital.

Foreign investment tumbles in Australian residential real estate

China was the largest source of approved residential real estate investment in the past quarter

Rising rates, construction inflation and shrinking investor confidence are pushing Australia deeper into a dangerous housing spiral that monetary policy alone cannot fix.