Would a foreign buyer ban improve housing affordability?
While home values have steadily retreated from their pandemic peak in recent months, they remain at near-record highs, posing an ongoing challenge for many Australians who want to own their own home.
In the September quarter of last year the national average home price sat at $889,800, data from the Australian Bureau of Statistics shows - 33% higher than in September 2019 ($668,800).
Joey Moloney, a senior associate at the Grattan Institute, says that the affordability of housing in Australia has been deteriorating for years though.
"If you think broadly about housing affordability as the share of income that people need to dedicate towards housing, there's no doubt that over the long run, it's gotten a lot worse.
"Within that, you can think about how affordable home ownership is specifically. That has gotten much worse over the last few decades as the deposit hurdle has gone up, which means that home ownership has fallen particularly among the young and the poor."
Australia's problems are by no means unique, as countries around the world are experiencing housing affordability issues of their own - one of which is Canada.
Like Australia, Canadian homebuyers have watched prices accelerate in recent years, with figures from the Canadian Real Estate Association revealing a near-doubling of prices between December 2012 (C$372,500) and December 2022 (C$717,000).
It's against this backdrop that, on January 1, a new law kicked into gear in Canada banning some non-Canadians from purchasing residential property in the country for two years - a move which the government hopes will give Canadian buyers a better shot at purchasing a home.
Though the success of the ban will be made clear over time, it's not without its critics who suggest that the move is more populist than pragmatic given that foreign buyers make up a relatively small share of the overall buyer pool in the country.
Still, given the parallels between Canada and Australia's housing affordability issues, is a similar ban worth considering in Australia?
The impact of foreign buyers
Arjun Paliwal, head of research at InvestorKit, thinks there is a misconception around the number of foreign property buyers in Australia given that the latest Register of Foreign Ownership figures show a relatively small number of purchases from overseas buyers.
"Analysing the data from this, from July 1, 2020, to June 30, 2021, 5310 residential real estate purchase transactions had a level of foreign ownership, with a total value of $4.2 billion. CoreLogic estimated that more than 550,000 properties were sold during that period, which equates to circa 1% of total transacted stock. Clearly, many are misled by the volume of transactions by foreigners."
Part of the reason that buyers from abroad represent such a small share of the market is that restrictions on the types of property they can buy already exist.
"Foreign buyers are generally limited to things like new-build property and they also have a higher barrier to entry in the form of higher taxes. So they're not, by any means, normal buyers - they are taxed heavily and restricted to a certain section of property supply," says Paliwal.
In fact, an argument can be made that, because foreign buyers are largely limited to investing in new properties, they are actually contributing to an increase in the number of homes in Australia.
"There's a balancing act here. In my view, investment that builds more housing should be unequivocally welcome given that the issue of supply is at the crux of the affordability problem," says Moloney.
"So the broad thrust of our existing position at the Grattan Institute on this is that you need restrictions in place, but it shouldn't be eliminated altogether because there are benefits to be had from foreign investment - particularly when building new housing."
In Paliwal's opinion, any further restrictions are ultimately unlikely to ease affordability issues for local homebuyers struggling to enter the market.
"Australia following along with other countries on a ban for foreign buyers would be a decision that is misguided and one that would not make any meaningful difference to housing affordability," he says.
"Foreign buyer interest in Australia could double, or it could be cut altogether, and it wouldn't make much of a difference in the grand scheme of things because the volume of transactions is so minute."
Supply and tax reform
So if a Canadian-style ban on foreign buyers is unlikely to have much of an impact on Australia's housing affordability problems, what could?
According to Moloney there are a number of reforms that governments could make to reduce demand and help improve levels of home ownership, the first of which is limiting negative gearing and halving the capital gains tax discount, and the second of which is increasing housing supply.
"Those two tax settings together are big drivers of investor demand for rental housing as a growth asset, so if you wind those back it'll make housing a relatively less attractive investment vehicle. That won't have a huge impact on price growth - we think it will trim about two percent off in the long run, but what it will do is reallocate some of the stock away from investors towards first home buyers.
"But in the long run if we want to make housing more affordable altogether, which is to say, slow the rate of price growth and contain the rents people are paying, then it is just a matter of increasing supply and reducing the constraints on supply.
"This needs to start top down with the federal government which needs an arrangement with the states whereby there are meaningful incentives for state governments to reform their land use regulations or their planning regimes so that it's easier to build housing in areas where people want to live at work."
In the short term, Moloney argues that there also needs to be more direct support given to renters who have bit hit with increases of 14.6% on houses and 17.6% on apartments over the past year, according to data from Domain.
"With this acute problem of a tight rental market, one of the things we should be prioritising right now is an increase in the rent assistance payment which is a supplementary payment made to income support recipients in the private rental market.
"That's what's needed right now, because there'll be low income people caught in the crossfire of the tight rental market who are not only going to struggle to afford increasing rents, but who are also at a heightened risk of not being able to secure housing in the first instance."
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