Foreign Investment and Australia's Property Mkt

Australia's economic stability during the GFC has made it an increasingly attractive destination for foreign investment (Bickers, 2013). An increase in foreign investment was further escalated by the relaxation in foreign investment regulations regarding property in 2009. One train of thought suggesting that the Australian housing market is indeed in a "bubble" is that this sudden increase in foreign investment is artificially inflating prices to unsustainable levels. As the demand for Australian real estate is driven upwards by foreign investors, the increase in prices do not reflect an increase in domestic incomes (Ferguson, 2010). It is feared that once foreign investors begin to lose confidence in the Australian housing market they will begin the pull out, leading to a decrease in demand for housing and a subsequent decrease in price or the "bubble bursting". Furthermore there is concern that the bubble will force local homebuyers out of the market (Andrews, 2010), or force them to apply for unaffordable loans as they are forced to accept the high prices set by foreigners.

From our graph (WAGES and FOREIGN INVESTMENT) we can see that up until 2009 housing prices have tracked wages however after this we observe a steeper increase in housing prices as compared to incomes. This indicates that the rise in prices is not fully due to domestic spending but potentially an increase in foreign investment. This could be due the regulation changes in 2009, foreign companies were allowed to buy properties for their employees (driven by the mining boom) and purchases by temporary residents did not need approvals anymore We believe that these foreign investment figures do not indicate a "bubble" state but instead represent growth for the Australian economy. Increasing real estate prices can be justified by the inflow of foreign investors entering the Australian economy.