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Australia's residential market has become an international commodity

We are currently in the midst of the strongest residential market since the GFC. Sydney and Melbourne in particular have seen a spectacular jump in market activity over the last three to four months. Auctions are at historic levels both in terms of the number of properties being sold and clearance rates. We are also seeing many new off-the-plan projects attracting what at times is frenetic demand. There are several key facts driving this activity, some of which are long-term and structural going way beyond a traditional market up-turn.

In mid January, looking ahead to 2013 I suggested here interest rates were set to be one of the key influences on every aspect of the residential market. This has proved to be the case with low rates, particularly over the last six months, impacting owner-occupiers and investors but also developers looking to fund new projects. Low rates have helped fuel demand and push prices up, while in many markets there is still a shortage of supply.

As we enter 2014 the question remains as to whether or not we have reached the bottom of the current low interest rate cycle, however seeking an answer to this question will not be any easy task as further cuts might not be good news indicating a much weaker local economy and bad news for employment.

However beyond interest rates, I think that a much bigger factor and one that has received little attention is the internationalisation of the local residential market. Like the share and currency markets, we are now looking at being a part of the worldwide demand for quality residential real estate. Offshore buyers are having a big impact and that trend is not going away any time soon. If Sydney and Melbourne are to be world-ranking cities then we have to accept that offshore demand will continue. Cashed up buyers from Asia in particular are attracted to our markets, often seen as a safe destination but also we are an appealing lifestyle destination.

We should not overlook the appeal of blue skies, fresh air and open space.  This offshore interest is not only confined to individual private buyers, but also developers and also now, in a trend I pointed to some 18 months ago we have seen the AMP join with Japan’s banks to enter the local home loan market.  And so we see international involvement across all areas of our residential development market. This trend is not new and other countries like New Zealand and the United Kingdom have either introduced or considered some curbs on foreign buyers but the same measures have been suggested for us, and given our very close links with Asia I do not think this is a credible idea.

In the UK prime London residential property has seen a big spike in prices with local officials looking at ways to generate more revenue. The idea is to impose a capital gains tax on foreign owners.

While UK residents have to pay CGT when reselling all but their main home, non-resident property owners do not. For example a UK-based buyer of an investment property or second home for £1m and then sold it for £5m. The UK resident would pay capital gains tax of £1.1m, assuming they were in the top tax bracket. An offshore investor, by contrast, is currently exempt from CGT. The lost revenue is proving tempting as Treasuries look for new revenue, and to some extent this action might also cool some areas of demand.

Offshore buyers are not going away

Offshore interest, no matter what fuels the demand be it lifestyle or investment considerations, is here to stay and just like the floating of the Aussie Dollar 30 years ago, the market may never be the same. Our markets are now considered desirable to a wide range of off-shore buyers and this is a major trend that will impact prices and demand.

Other big factors remain the rapidly changing demographics of our cities and shifts in lifestyle that all combine to create new pressures that will heavily influence markets and how infrastructure is delivered. Both the issues will continue to be very big topics in 2014, alongside how efficiently and where we create new supply.

However there is currently no indication that any sort of new policy measures are planned here to curb off-shore demand or investment. However another big ticket item next year will be the federal government’s tax review and how this might address the very big question of housing affordability, otherwise this issue could shift from a financial policy to one that has far reaching and possibly negative impacts on social policy and cohesion. First time buyers despite very low mortgage rates are now very much absent from the current market, they are being locked out by varied and complex factors.

While offshore demand is a structural change, I think that borrowers of all kinds might also have seen the best of low interest rates, but continued and very spiked demographic changes and the internationalisation of our markets will continue to be the big drivers of apartment demand and development in 2014.

Peter Chittenden is managing director for residential of Colliers International.


Peter Chittenden

Peter Chittenden

Peter Chittenden is managing director for residential of Colliers International.

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