Foreign-fuelled housing boom weighs on Australia

A sustained property market boom in major Australian cities partly fuelled by a flood of foreign money is pricing first-time buyers out of the market - and causing problems for policy makers and the country's central bank.

Record low interest rates, a rise in property speculation and a surge in overseas buyers are causing residential prices to rocket in some of the world's biggest cities, including London, Singapore and Hong Kong. Regulators warn of an increased risk of destabilising bubbles, and it is becoming ever harder for first-time buyers to get their foot on the property ladder.

"We'd prefer a house but they are just too expensive," says Kate Homan, one dozens of people squeezed inside a two-bedroom apartment in a Sydney suburb listed for sale at A$750,000 (US$600,000). "The heartbreaking thing is when you come to these auctions and see investors outbidding everyone else."

Fears of a housing bubble in Sydney are complicating the Reserve Bank of Australia's efforts to stimulate growth. The central bank has cut interest rates to a historic low of 2 per cent but further monetary easing may depend on a moderation in house inflation in Sydney and Melbourne.

"The RBA would find it hard to cut again if prices continue to surge," says Ivan Colhoun, economist at National Australia Bank.

Prices in Sydney have surged 14 per cent over the past year and 40 per cent since mid-2012. Auction clearance rates are running at record highs as investors - who now account for half of all mortgages issued - flood the market.

Official figures show the percentage of property purchases made by first-time buyers fell to 13.7 per cent in February, down from 18.5 per cent in mid-2012 and a high of 30 per cent in 2009.

Opinions are divided on how severe the risks posed by Sydney's property boom are to financial stability.

Doves point out prices are rising more slowly in most areas outside Sydney and Melbourne, and falling in Perth. Loan default rates remain at historically low levels and since 2008 Australians have been saving more using excess cash to pay their mortgages off early.

Hawks say household debt is among the highest in the world at about 1.8 times annual disposable income, and that the proportion of riskier "interest-only" mortgages issued by Australian banks has increased from 32.4 per cent in May 2012 to 43 per cent in December 2014.

Regulators and policy makers have begun to follow the UK and other jurisdictions by cracking down on foreign investors and threatening to impose lending restrictions on banks.

"Any Australian that goes to an auction needs to know that they are competing on a level playing field," said Joe Hockey, Australia's treasurer, last week as he unveiled tough new rules and a fees regime for foreign investors.

He denied the crackdown was a "witch hunt" but revealed 100 foreign purchases are being investigated. Golden Fast Foods, which is owned by Chinese billionaire Hui Ka Yan's Evergrande Real Estate Group, is being forced to sell a A$39m Sydney mansion, which is alleged to have been bought illegally.

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But some analysts dispute claims foreign buyers are pushing up prices to the detriment of first-time buyers. While the value of foreign investment in residential property doubled to A$34bn last year, developers - mainly from China - are building thousands of new apartments, adding much-needed supply.

Saul Eslake, economist at Bank of America Merrill Lynch, says it is Australian investors who are doing most of the "pricing out" of would-be home buyers, not foreigners. He pinpoints the main culprit as "negative gearing" - a tax break through which property investors can claim as losses the financing and other costs of their rental properties against other income.

The tax break has proved so popular that almost 15 per cent of the electorate have become property investors, costing the government A$4bn-A$5bn in lost revenue, says Mr Eslake.

But abolishing such a popular measure is politically tricky and despite a lively debate ahead of next week's budget, the government has signalled it will not phase it out.

In the absence of any move on negative gearing, in December regulators issued tougher guidance to lenders for home loans, setting a 10 per cent limit on growth of mortgages to investors.

At the property auction in Sydney, the two bedroom apartment sold for $825,000, leaving two families bidding on the property disappointed.

"We'll be heading to another auction next week," says Ms Homan. "But the prices people are paying are crazy."

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