So what’s the scale of foreign investment in the Australian housing market?

As Glenn Stevens noted last week, the data is a little unclear. Nor will it get any clearer as a consequence of the government’s changes to the rules around foreign investment in property last year. The Foreign Investment Review Board’s most recent annual report is for 2007-08, the economic equivalent of when dinosaurs roamed the earth. FIRB is purely an advisory body for the Treasurer, and exists within Treasury, so it is not a separate agency with its own annual reporting requirements.

That year, there were 7354 foreign real estate investment applications approved, out of total of 7841 foreign investment applications approved to FIRB — you can see why the government was interested in reducing the level of real estate applications it handled.

Only a handful of applications were rejected — in fact one of the reasons for the government’s December 2008 changes was because the vast bulk of real estate applications were invariably approved.

The bulk of the foreign real estate applications was for residential real estate — 7171 out of the 7354 — but most of the value of the applications was for commercial not residential property.  In 2007-08, foreign buyers bought $16.77 billion worth of residential property but $19.23 billion worth of commercial property.

The removal of the temporary resident reporting requirement means we can’t track data at that level in the future, whenever FIRB produces its next annual report.  According to Treasury’s 2008-09 annual report, FIRB handled  5800 foreign investment applications (whether real estate or not), down from 8500 the previous year, showing the impact of the government’s changes in just the final quarter of the financial year.

But 2007-08 can give us a sense of scale. Data from RP Data-Rismark provided by Christopher Joye shows there were 402,734 home sales in 2008.  Those 7171 applications form less than 2% of sales.

But when it comes to value, the significance of foreign investment is greater: the $16.77 billion was part of a $166 billion market.

That suggests that foreign investment is targeted at property development (a good thing — it adds to housing stock rather than purchasing existing stock).  It may also confirm the anecdotal impression that foreign investors disproportionately target the top end of the market when they do purchase existing housing stock.  The idea of young Australian families being priced out of their first home by Chinese investors seems unlikely when foreign investment targets the wealthiest suburbs.

In fact on closer analysis it’s hard to see exactly where the government’s changes have generated additional pressure on housing stock.  To the extent that they encourage greater foreign investment in housing development, that will serve to increase housing stock.

The removal of FIRB reporting requirements may encourage more temporary residents to buy property, at the margins.  The expansion of the temporary resident category to include shorter-term visas may also marginally increase the number of potential buyers of existing residences. The number of foreign students won’t change in response to the changes — in fact, removing the $300,000 cap may reduce pressure on the lower end of the market. And foreign purchasers still can’t buy vacant land and bank it simply for the purposes of speculation — they must start developing it within 24 months.

Permitting foreign companies allowed to purchase established dwellings for the use of their Australian-based staff will add to the number of buyers of existing housing stock.  But like temporary residents, these are people who are here already.  None of the changes will actually increase the number of people in Australia looking for somewhere to live.

Re-tightening the rules about foreign investment in residential property would simply shift the pressure back to rental property, because that’s where you live if you can’t buy a dwelling.  Temporary residents, foreign students and foreign employees of companies still need a place to live while they’re here.

But pressures in the rental property market don’t attract the same media interest as housing, because renters tend to be lower-income and because a smaller proportion of the rest of us are property investors than home owners. As I wrote yesterday (Sinophobia and the property boom) the media prefers the angle of sinister Chinese investors preventing young Aussie couples from getting their start in the property market.

One of the traditional functions of xenophobia is as redirection from the real source of social problems. Australia’s housing supply problems are complex, but a contributing factor at the political level is that property owners have a strong interest in rising property prices, even if they’re old enough to watch their adult children struggle to be able to afford their first home. Blaming the Chinese is a convenient cover for a problem that lies much closer to home.