Question:
Discuss about the Opportunity of Residential Property Investment.
The objective of this research proposal is to analyze on whether foreign investment influence the residential real estate market in Australia and housing affordability. Housing is considered as the most vital asset that is owned by majority of the households of Australians. It is a huge household wealth component and act as investment vehicle for the people in Australia. Huge mortgages as well as business loans are secured against the Australians residential dwellings. It has been noted from the recent study that residential real estate market contributes hugely to the Gross Domestic Product (GDP) in Australia (Burke, 2012). The problem that arises from this residential real estate market is that variation in residential property prices influences the behavior of economic variables that includes household consumption in other goods and their financial stability (Newton & Glackin, 2014). Over the past few decades, the residential prices have risen by an average of 7 ¼ % each year. As a result, the residential real estate market has reflected steady growth by around 3% each year since the year 1970. At the end of year 2000, the prices of residence in Australia in relation to average income were recorded highest in the globe. In addition, in the year 2011, the prices of residence accounted six times of the average income of the households in Australia. However, this nation experiences real estate bubble during this period. Furthermore, the increasing residential prices as well as low rate of interest have stimulated the growth of the residential real estate market in this country (Wadud et al., 2012). Despite bad economic conditions, the prices of residential property’s have increased strongly due to support of government incentives and this supported in the real estate market growth. In addition, foreign investment plays a vital role in strengthening the residential real estate market in this country. This means that the demand as well as supply of housing in Australia real estate market increased owing to foreign investment. However, this demand in residential market generated several construction projects, created new opportunity for the household to buy the property and increased employment in the nation. On the contrary, huge foreign investment created problems of housing affordability (Agarwal et al., 2015). This means that rise in prices of residence in Australia pushed domestic home purchasers out of residential market and near about 10-20% of new housing are brought by foreigners. It has been opined by Blomstrom (2014), foreign investment is considered as the main driver of causing housing affordability problems to the low income households in Australia.
Recent study shows that the average price of residence has become equivalent to the average earnings of people of seven years. There are few factors that contributes to the rise in residential property includes-
The main aim of this research is to examine both long term as well short term impact of foreign investment in Australia’s residential real estate market and housing affordability. This research proposal also facilitates in clarifying few question that arises from this topic. These research questions includes-
Over the past few years, this nation has experienced huge inflow of capital into real estate industry, specifically in residential real estate market. This directly raised supply of new residence and thus adding benefits to real estate industry as well as suppliers. On the contrary, it has been noted by some observers that foreign investment in residential real estate market has led to rise in prices of housing mainly for the first home purchasers (Newton & Glackin, 2014). As a result, it results in decrease in housing affordability in this nation. In contrast, some observers have commented that foreign investment has not much significance in Australian residential real estate market and housing affordability as it accounted for around 5-10% of national housing turnover value. in addition , they have also argued that foreign investment does not cause market distortions for the first buyers as foreign investors operates at various price brackets from them and purchases numerous kinds of properties.
Recent study reflects that the overseas buyers basically facilitates in making residential property’s more affordable as their investment in this industry enhances the economy. As foreign investment has resulted in rise in prices that are hugely influenced by migration and hence supply of residence cannot meet the demand for it. In addition, high population growth as well as low interest rate raised the housing prices and this affected the activities of the first purchasers in the market (Lieser & Groh, 2013). Therefore, the buyers could afford to buy the residence due to low income and as s result, they try to shift to other places or invest in other sectors. This shows that foreign investment adversely impacts on the first buyers activities. On the other hand, foreign investment has some positive aspects that includes- providing huge job opportunities for the unemployed that in turn boosted the economic growth of Australia.
Although foreign investment in residential real estate market has shown adverse impact on first buyers, it has remained beneficial to this industry. As no restrictions are there for the purchasers of new residence, the operators in this market attained huge benefit from the foreign buyers (Lee et al., 2015). For example, highest number of purchase of residence by foreign buyers was recorded in Victoria. This rise in sale of residence with high price increased the profitability level of the suppliers. Moreover, it improved the performance of real estate market in this nation.
It has been evident from few studies that the foreign investors actively participate in investing in the residential real estate market since global financial crisis in 2008. It has been opined by Moran (2012), the main reason behind rise in housing prices was the foreign investors. In the year 2015, the prices of residence rose by 5%. In addition, the total sales of housing in Australian real estate market that accounted for 16%, were given to the foreign purchasers. In the era of global liberalization, operators in real estate market attained benefits from foreign investment that helped them in expanding their business globally. The main determinants that has been cited for foreign investors interest on real estate industry was rising liquidity level , higher returns and huge opportunities (Beracha & Wintoki, 2013). The trend that emerged after the financial crisis in the year 2008 with the SWF (Sovereign Wealth Funds), organizations of wealth management, private bankers and rich families moving into market activities of international property that deserted corporate bankers.
Traditional determinants for which foreign investors invest in Australian residential real estate market
The traditional determinants cited for which the foreign investors purchases from the residential real estate market of Australia were-
Therefore, all these determinants influenced foreign investors to invest in residential market of Australia. As a result, foreign investment increased in the Australian residential real estate market.
Impact of foreign investment in Australia’s residential real estate market and housing affordability
Foreign investment in Australia’s residential real estate sector has been a financial as well political problem over the last few years. The sharp decline in rate of interest has been the crucial driving factor that increased activities of foreign buyers and high-rise in prices (Liao et al., 2015). The housing market in Sydney has been seen as the leading platform of capitals over last three to five years. The prices of the housing have been rising strongly and this affected affordability of first buyers. On the contrary, the real estate market of Australia has no restrictions for purchasers of new housing and this became beneficial for the operators of the real estate market. According to the latest data from Foreign Investment Review Board (FIRB), it reflects that the contribution of the foreign investors in the real estate market activity is minimum. This highlights that the foreign investment have little impact on the residential market in Australia (Crowe et al., 2013). Recent study reflects that in the year 2013-2014, the FIRB permitted 7195 applications by the foreign purchasers for buying home in Australia. Therefore, it represented only 2.4% of established residence title transfers that had been registered during the same period. On the other hand, the highest number of residence purchases by foreign purchasers during this period with 3483 and this was followed by New South Wales. It has been noted from recent study that overseas purchasers actually facilitates in making housing affordable as their investment provides huge job opportunities to the unemployed persons in Australia and also enhances the economic growth. In fact, the overseas buyers plays a crucial role in increasing the supply of residence (Cesa?Bianchi et al., 2015). It has been stated by Krause and Bitter (2012), though the foreign investment contributed to rise in supply of housing, the rise in prices creates difficulty for the first residence purchasers to break into real estate market. The price at which the foreign investors tend to purchase the properties were not within the price range that local purchasers afford to purchase.
In addition, several other factors that drive the residential market demand in Australia includes-
It contradicts from the above analysis that foreign investment improves the performance of the real estate market in Australia. Moreover, some economist says that increase in demand and lack of housing supply is cited as another reason for increase in prices of high residence (Cecchetti & Kharroubi, 2015). It has been noted from recent report that, foreign investment is not the main factor that raises housing prices. There are numerous factors that throws huge impact on the housing prices rather than foreign investment involves. These factors includes-
Furthermore, it has been argued by the Reserve Bank of Australia (RBA) that low rate of interest did not adversely affect on the housing price rather it raised attractiveness of domestic investment in high yielding property and this outcomes in huge demand for the housing property in real estate market (Beracha & Wintoki, 2013). Therefore, it is noted from the above fact that foreign investment does not much significance in residential real estate market of Australia and is not the main reason for creating housing affordability problem in the nation.
As opined by Burke (2012), the policy adopted by Australian government for foreign investment in housing market aims in increasing the housing stock of this nation. The applications received from the non residents for purchase of new residence are approved without any conditions, but in case of established residence it is prohibited. It has been seen from the recent data, bulk of approvals is usually approved for investment in new residence in contrast to existing residence. This recommends that demand for new residence in other countries have been channeled into rising supply of residence as intended (Blomstrom, 2015). It has been argued by some economist that foreign demand has priced out first home purchasers. In recent decade, the level of demand for new residence in foreign countries increased strongly. For example, the rising significance of Chinese demand for residential real estate raises Australia’s exposure to the factors influencing China. Furthermore, any variation to attractiveness in acquiring assets outside China impacts on the international demand for residential property in Australia and this might have implications on economic as well as financial condition in the country.
In this study, the qualitative research has been used for evaluating whether foreign investment has an impact on the residential real estate in Australia and housing affordability (Bath, 2012). For analyzing this impact, several methods have been applied that includes research philosophy, data collection methods and sampling design.
Research paradigm facilitates the researcher in classifying the research principle with respect to the research topic. There are four types of research philosophy that includes- pragmatism, positivism, realism and interpretivism.
Positivism philosophy refers to scientific data collection as well as positive facts that have been recognized from the empirical data. This philosophy highlights on the society that functions according to common laws. This philosophy helps the researcher to construe the information that has been obtained by applying logic.
Realism philosophy relies upon the assumption the scientific approach based on the reality of developmental activities.
Intrepretivism philosophy refers to social approach that ally with idealism and is implemented in the research by via qualitative research. It mainly helps in interpreting the elements of research as well as merge individual ideas for the particular research topic.
Pragmatism philosophy helps in assessing the theories of research in respect of practical application.
In this research paper, positivism philosophy has been applied as it relates with collection of real data that is mainly attained through observations (Armstrong-Taylor, 2016). It also highlights on the society that works with respect to general laws. Moreover, it has been seen that positivism philosophy helps in attaining correct outcome of this research.
There are mainly two types of research method- inductive and deductive. Deductive method refers to an approach that survey on the theory as well as test the validity in specific situation. This method deals with hypothesis testing with respect to secondary data. This method is basically concerned with quantitative data.
Inductive approach concerns with qualitative data and utilizes observations in order to expand common principles about the research topic. The researcher gathers information and then explains the prototype for developing new theory.
In this case, the deductive approach has been used in order to assess the impact of foreign investment on the residential real estate market of Australia and housing affordability (Bouchouicha & Ftiti, 2012). This method benefits the researcher as it acquires less time in completing the research. This method also helps in acquiring accurate outcome from this research.
The data collected helps in revealing the genuineness of the research. There are two types of data collection methods that involves- primary data and secondary data. Primary data is basically collected from the surveys. Secondary data is mainly gathered from journals, magazines and internet. Primary data is segmented into two types that includes- quantitative data and qualitative data. Quantitative data are analyzed by using numerical as well as statistical inferences. It basically presumes reliability and is categorized in respect of discrete data. Quantitative data is collected through different methods that includes surveys, observations etc. Qualitative data classifies the objects in terms of characteristics as well as properties.
Secondary data including property database were used for conducting this research. In this research, Quantitative research technique has been used with semi-structured interviews. The aim of qualitative research is to examine the research topic through feedback as well discussions with the respondents or stakeholders participating in the interview. The interview was mainly taken to the stakeholders and foreign as well as domestic investors. This also helps in identifying how the policies adopted by the Australian government affect foreign investment in residential market of Australia. It also helps in evaluating the affect of nontraditional determinants on the decision making of foreign investors (Adeniyi et al., 2012). In addition, Chinese investors were the main participants for this interviews as they investment in this sector was huge over the periods. The interview selection were mainly based on their involvement in this industry and in respect of their seniority in decision making procedure. Moreover, the data collected were voice recorded and transcribed.
Sampling method refers to the technique including total respondents taken from the total population in a sample. The method used for this research is simple random sampling in order to obtain accurate outcome. Simple random sampling refers to the samples, which are selected randomly from huge population (Peter, Svejnar & Terrell, 2012). In this case, the operators as well as purchasers are given equal chance to be chosen from huge population. Sample size of 100 respondents were taken from the total population those who are involved in this market. In addition, the survey questionnaires was formed based on the operators experience in the real estate market, foreign as well as domestic investors.
From the above report, it can be analyzed that foreign investment throws less impact on the Australia’s residential real estate market and housing affordability. In addition, a semi-structured interview was mainly conducted in Australia for seeking accurate information in order to justify this research topic. It has been noted from the above study that after the global financial crisis, the real estate market of Australia has improved not only due to foreign investment but also several other factors such as education visas etc.
References
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