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Standing Committee on Economics
Foreign investment in residential real estate

KENT, Dr Christopher, Assistant Governor, Economic Group, Reserve Bank of Australia

ORSMOND, Dr David, Deputy Head, Economic Analysis Department, Reserve Bank of Australia

Committee met at 08 :59 .

CHAIR ( Ms O'Dwyer ): Welcome. This is the fourth public hearing for this inquiry into foreign investment in residential real estate in which we will continue to take evidence into whether the current regulation of foreign investment in residential property in Australia is delivering its intended benefits to our community and to our economy. At a public hearing in Melbourne last Friday we heard testimony from industry peak bodies, real estate companies and commercial banks on regulation and the impact of foreign buyers entering our residential property market. Two days ago, in Canberra, we explored with the Australian Bureau of Statistics the possibility of addressing the current information gaps that exist for these types of investments.

Today in Sydney we will hear from the Reserve Bank, major industry stakeholders and real estate market analysts. The committee looks forward to expanding on the issues that have been raised so far in this inquiry. I thank all of the witnesses who will be appearing today and will be contributing to this very important discussion.

I remind witnesses that although the committee does not require you to give evidence under oath the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. Would you like to make an opening statement?

Dr Kent : Thank you for the opportunity to discuss this topic with you today. As was summarised in our submission, foreign residential investment has been a feature of Australia's housing sector for many decades. Foreign demand for housing has supported the local construction industry, while foreign based developers provide access to alternative sources of financing and add a degree of competition to the sector. Some recent housing purchases have also been associated with the increase in the number of families, particularly from Asia, who want to educate their children in Australia. More broadly, foreign residential demand in Australia is linked to the rise in income and wealth globally, but particularly in Asia, which is adding to business opportunities as our economy becomes more integrated with others in the region. This is welcome and it is to be expected.

An underlying theme in much of the commentary has been whether foreign residential investment has increased the demand for Australian housing by more than it has increased the supply, and hence whether it has led to an increase in housing prices, especially for first home buyers. The data clearly shows an increase in the level of approvals for foreign residential purchases over time, but it is difficult to know how much this has boosted net demand for Australian housing. While varying a bit from year to year, the data published by the Foreign Investment Review Board suggests that foreign purchase approvals have been fairly low as a share of national housing turnover. Specifically, the FIRB data suggests that the value of foreign residential approvals has generally been about five to 10 per cent of the value of national housing turnover. Using several assumptions, we estimate that the number of foreign approvals has been around half that five to 10 per cent range.

In its submission to this committee the FIRB included data covering the first three-quarters of this financial year, which shows a rise in approvals, especially from new dwellings. Nonetheless, it is important to remember that the share of actual residential purchases by foreign citizens and temporary residents is likely to be much lower than the FIRB suggests, because not all of the approvals lead to a purchase. This point is outlined in our submission and indeed in a recent article we published in the bank's bulletin.

It is worth emphasising that the purchase of a property by a foreign citizen or temporary resident may not contribute one-for-one to net housing demand in Australia. For instance, there would be little effect on net demand if the property purchased is used to house foreign students, who would otherwise have needed to rent during their stay here. Similarly, net demand for housing would be little changed if an investment property is subsequently rented out. There is no comprehensive information on the magnitude of those types of transactions, though. So while it seems likely that foreign residential purchases have added somewhat to net housing demand, there is no way of knowing the exact extent to which that has been the case.

Whether an increase in net demand, be it from foreign or domestic sources, leads then to higher housing prices depends on the responsiveness of supply, of course. This subject has been especially topical of late, with housing prices nationally rising by close to 10 per cent over the past year. The rise in prices has primarily reflected increasing housing demand from Australian residents and citizens, partly owing to the low level of interest rates.

The supply in housing is responsive to a rise in housing demand but, given the time that is needed to plan and build new housing, that typically occurs with some lag. However, several factors can accentuate that lag, including a shortage of well-located land; geographical constraints, in some of our capital cities; the complexity of the planning and approval process, which adds to the time and cost of new housing developments; and concerns of existing residents in regard to new development projects in their vicinity. As you can understand, these are not easy issues to address, although it is widely agreed that an appropriate balance needs to be struck if housing is to be provided at reasonable cost.

Through the bank's business liaison we hear from housing market participants that impediments to increasing the supply of housing in some greenfield area have eased a little in recent years. Also, there has been interest in converting some of the older office building in central business districts into residential use. That may ease the shortage of land in highly sought after areas. However, our contacts also report that more could be done to increase the responsiveness of supply to demand.

Notwithstanding general concerns about the responsiveness of supply, the information available suggests that foreign residential purchases have probably not had a large direct effect on the price of housing that is typically purchased by first home buyers. While incomplete, the FIRB data and the information received through our liaison with developers suggests that most foreign residential purchases are for new, high-density, inner-city properties, as well as properties close to universities. Furthermore, the properties they purchase tend to be valued well above the average national sales price. In contrast, most purchases by first home buyers have been for established homes that are priced well below the national average. Moreover, when they do purchase new housing, first home buyers appear generally to purchase detached homes close to the fringe of the main cities rather than new apartments located close to the city centres. There are some foreign buyers who purchase cheaper homes outside the inner-city areas, just as there are some first home buyers who purchase inner-city properties priced above the national average. But in the main foreign buyers appear to be purchasing properties that are typically quite different in their characteristics from those purchased by first home buyers.

Finally, I would like to comment briefly on the issue of the availability of data. FIRB's main role is to ensure foreign purchases are consistent with the rules, rather than to provide data on the actual level of foreign investment. Even so, I think a case could be made for more timely provision of the approvals data that is already collected by FIRB, perhaps publishing them on a quarterly rather than an annual basis. Also, more granular data could be provided, such as approvals within broad price brackets, rather than just the total value and the total number of approvals. Beyond that, however, the benefits of any new reporting requirements in this area should be weighed carefully against the cost of its collection and its administration.

CHAIR: I would like to take you back to first principles. What in your view is the benefit of foreign investment in residential real estate in Australia? Also, could you take us through what you believe to be the potential negatives. So, from you point of view, what are the positives and the negatives?

Dr Kent : The benefits can be thought of in a number of different ways. The first is that it is hard to be sure but foreign demand has probably boosted construction. That foreign demand appears largely to be self-financed. That is, the people coming and buying their houses typically come with their own finance. I think more broadly, though, this sort of activity, these foreign purchases, are linked to the closer economic integration that we are all experiencing globally. Sydney and Melbourne are especially experiencing that, and I think that is just a recognition that they are global cities. We all know that they are good cities to live in, for all of their difficulties at times, and foreigners recognise that too.

An obvious other economic benefit, if you like, is that many of these purchases are associated, as best as we can tell, with foreign students—reasonably well-off foreign students whose parents are perhaps buying them apartments rather than renting them something and along the way therefore contributing to construction. More generally, though, I think that these sorts of purchases are associated also with business links of different types and other capital inflows and business opportunities.

So, those are the sorts of foreign buyers. There are also foreign developers here that we talk about in our submission. I think what they do is provide access to alternative sources of financing. They add a degree of competition on the supply side. Our own liaison suggests that often what is happening is that a foreign developer is managing to get pre-approvals from foreign buyers for something that has not yet been built. The foreign buyers say, 'Yes, we'll buy in that development'. That has helped to get certain large projects off the ground that might not otherwise have been proceeded with in recent years. And then many of the units that are built in these blocks are available and sold to Australian residents. In terms of the costs, there is some possibility that it is adding somewhat to prices. I do not think that is the main story; I think it is a marginal story. But, again, the key issue there is not so much the demand but that surely we should be able to provide a good supply of housing at reasonable cost that is well located next to infrastructure, transport facilities and the like.

The other one is concerned perhaps with the exposure to foreign business cycles—if there is a shock that somehow affects buyers who have come from offshore and they feel the need to suddenly sell their assets. That might be some risk to housing markets here. But that is very much a double sided coin. If there are domestic shocks they can provide a measure of stability and indeed when finance was maybe a bit tougher to come by in recent years for some developers maybe this foreign source of capital was a helpful one to enable construction to proceed. The other point, as David can attest to, is that our liaison suggests that these buyers, even though there is that risk of flight in an offshore crisis, tend to be pretty sticky buyers; they tend to stay.

CHAIR: I might just pick up on a couple of the points you have raised, and I will pick up on your last point first and explore that a little bit further. Obviously with residential real estate in Australia we are talking $5 trillion, or over that amount, at best estimates. In terms of the exposure of that particular market to these business cycles, what would you rate as the risk? How significant is the exposure, as you have just outlined to us and as is in your submission, to these business cycles from overseas?

Dr Kent : Do you mean if foreign buyers suddenly decided to pull up sticks and sell their properties because of some problem at home?

CHAIR: That is right.

Dr Kent : I would not overstate that. It seems fairly modest to me. It would be of significant concern if the whole world was experiencing difficulty, such as during the GFC. Foreign buyers were here in the country then, and there was not a sense that they were suddenly up and selling houses more than anybody else was. Prices dipped a bit here in Australia at that time, but we managed to get through that fine, and I do not think that the foreigners had a particularly exaggerated role in any of that.

CHAIR: You also talk in your submission about foreign demand having a potential impact on the exchange rate. Perhaps you could talk a little bit more about that.

Dr Kent : I think basically any capital inflow represents foreigners saying that they want to purchase Australian dollars. That by itself would tend to push up the currency at the margins. But I think we have to put this in perspective. As best as we can tell, money coming in to the real estate sector from offshore is relatively modest in the scheme of the very large capital inflows that Australia has enjoyed for many years, including, most recently, to fund the mining investment boom. So I think it is fairly minor in comparison with that sort of demand.

CHAIR: You were talking about foreign investment potentially increasing the demand for residential housing—increasing the dwelling stock here. What do you think about this question of the occupancy levels? If it is not occupied, if it is not being either sold or rented, what overall impact does that then have? Do you think it is a net positive? How would you describe it?

Dr Kent : I think the first question is to try to understand how much of that might be going on, and we do not have any official statistics on that. But David can maybe mention briefly what our liaison tells us about that.

Dr Orsmond : In the context of the bank's operations we talk to a lot of businesses, and a lot of those are businesses in the housing sector—developers and so forth. So that is one of the questions we have asked people—what their perception is of those who are actually building the buildings and then seeing what happens about what we call ghost ownership, where the purchases are made and then the property is just left vacant. Many of the companies we speak to do not actually have an impression on it; they are not sure. But those who do venture an answer say that they believe it is very small, that when they see their properties when they are finished and they have a look at how many lights are turned on and so forth there is very little evidence of ghost ownership. It is just an impression. As Chris said, there is no firm data on this. But that is what they tell us.

CHAIR: Do you think there is a way to get firm data on this, rather than dealing in anecdote?

Dr Orsmond : I think it would be very hard to get data, because you might find that the lights are not turned on for a month or two months and so forth, but that might just be because someone has gone on vacation or gone back to their source country. I think it would be very difficult to come up with anything more than just the impressions that are out there—which, as I said, to the extent that people venture to say it, it is probably pretty low.

CHAIR: I have one final question before I throw to the deputy, who will talk about some of the shadow banking issues, I think. You say in your submission that you think there is potentially an over-representation in the FIRB figures of foreign investment approvals, as opposed to actuals—so that we are clear on that. I am interested to know, though, in circumstances in which people perhaps are not notifying FIRB at all, do you have a view on whether or not it could be more accurate because people might not in fact be notifying FIRB?

Dr Kent : Our submission definitely notes that as a possibility. If someone is not notifying FIRB one way or another then obviously it is not going to be in their statistics. But what we do know on the approvals being converted into actual sales is that in many cases a large developer, or even a mid-size developer, will get blanket approval to sell every unit in their development to a foreign buyer. That covers them if that is what they end up doing, but in many cases they do not. And I believe FIRB even provides estimates of that for some of the very large developments, because they do follow that up and get that information. So, even though the approval in terms of the value and even the numbers can be quite high, that is a blanket approval to start with, and at the end of the day many of those units in an apartment block are then sold to Australian citizens.

CHAIR: I understand that point. The second part of my question, though, is: do you have a view on people who do not notify FIRB at all? Do you have any sense of what the numbers might be in that regard?

Dr Kent : No, because by definition there is no way to know.

Mr HUSIC: We have had a number of submissions from various organisations that have argued or taken the view that foreign investment has boosted housing supply. When I go through pages 5 and 7 of your submission, you seem to me to take a position—and if I am putting words into the RBA's mouth incorrectly I am sure you will correct me—that in the longer term it does increase supply. You also say on page 7 that the impact of foreign based developers adding to overall supply of new dwellings is more difficult to determine. Is it possible to get a clear assessment or the position of the RBA on the impact on longer term supply? Would you agree with some of the other submissions we have received that say that foreign investment in the residential property market boosts supply?

Dr Kent : I think our sense is yes, but the magnitude is very hard to know. You need to ask: what is the counterfactual? That is what people often do not do. As I said in my opening remarks and in our submission, the developers are often bringing in their own finance. At times they did that during periods when some developers here were having difficulty getting finance, so projects got off the ground that might not otherwise have got off the ground. So that is clear evidence that yes, it is adding something to supply that would not otherwise have been there. But then you also have to ask the question: if a developer is here doing activity that might otherwise have been done by a local developer, is that a net addition to supply? You just do not know the answer. The same is true of a foreign buyer. If they were not purchasing it, would the property have been built? Somebody else might have purchased it, perhaps a domestic investor. It is very hard to say, but I think it is hard to argue against the notion that it has incrementally added to supply. You just cannot be very definitive about it. I do not know if David can add anything to that.

Dr Orsmond : No, I think that is basically exactly the point. It is difficult to come up with what the counterfactual would be from all sides. Nonetheless, the general increase in wealth and income in other countries, including in Asia, and the integration of Australia within that—the closer business ties and so forth—is all probably adding somewhat to net demand for housing here, and supply is responding accordingly.

Mr HUSIC: Another area that we have spoken about previously when the governor has been present at other hearings that the committee has held in relation to the RBA is the issue of the rise of shadow banking and alternative lending avenues within China. I am detecting varying schools of thought within the RBA about whether or not there are issues with the growth of shadow banking, which is not necessarily a bad thing inherently. It is just an alternative path supporting wealth creation.

The governor expressed some fairly firm views in March, particularly about the loans that arose during the GFC and whether or not those loans, if they had not already gone bad, would. Yet Assistant Governor Debelle last month seemed to believe that the concerns about shadow banking were misplaced. If shadow banking is being used to finance either development or purchase here in Australia, is it something that we should be concerned about, or is it overplayed, as the assistant governor suggested? What impact might it have in terms of the exposure of local banks to risk?

CHAIR: I will just add one question to that: how significant is it in this market?

Dr Kent : Golly, there is a lot in there! I will try to unpick it and ask you to come back to it if I have not addressed all aspects of the question. In terms of the varying schools of thought within the bank, I do not quite see it that way; I think they were potentially answering slightly different questions and so the nuance is probably important. My sense of what the governor said in, I believe, March, when he was talking about this to the committee, is that his answer suggested he was focused very much on the question of what shadow banking implies for the financial risks in China. The way to think about it and reconcile it with what Dr Debelle has said is to recognise that it has both benefits and costs, and the Chinese authorities would be the first to recognise that. I will address that and then come back to what it means for Australia in the context of this inquiry.

In terms of what is happening in China, shadow banking essentially is just a term to describe part of the financial sector that is not as tightly controlled, directed, regulated as the formal banking sector. That said, the authorities still have oversight of many aspects of what is called shadow banking, and that is under the guise of the China Banking Regulatory Commission. In China in the banking system there are quite tight controls on a number of aspects of their activities, including the rates they can pay depositors and where they can lend that money to. Almost as a way of liberalising their financial system, because their banking system is not nearly as liberalised as in many advanced economies, they have seen fit to actually encourage in many ways this other activity. It allows Chinese residents who are depositors to get a slightly higher rate of return, possibly at some higher risk but certainly a higher return, and it allows some of that money to be funnelled into activities which could be quite productive, but they also could be a little risky.

I think what the governor's comments were referring to was that particularly during the financial crisis, when one of China's responses to the weakness globally was to put a lot of credit out into the system, he had no doubt that some of that would have found its way into loans that would probably end up going bad—and I think that is hard to deny. The Chinese authorities are conscious of that and it is an issue that they are trying to manage. So it has benefits and risks: a higher return in terms of the depositor; a higher return in terms of its lending activity that might not otherwise get funding, including activity in China outside of the state sector, so it is private sector activity that is quite productive but it is not without its risks. That is how I reconcile that side of things for what it means for China.

In terms of what it means for Australia, we do not know, we cannot be very precise, but here is my sense of things. It may be a source of some funding for some of the larger foreign developers which are operating here. The foreign developers, the Chinese ones, who are building properties here in Australia might tap into some of that finance to fund their activities here. But I do not think it is likely to be a source of significant funding, if much at all, for foreign buyers. I think we have to recognise they are typically reasonably affluent, particularly from China, and have very high savings rates—but that is true of much of Asia as well. It might be strange to our way of thinking but many of them are actually able to self-fund those purchases here. Even in China, and even when they are going to the banks for their funding, they typically put down a very large deposit, much larger than our first home buyers would be used to, maybe in the order of 50 per cent. Does that cause concern? Probably not for us directly, I think, in terms of the foreign buyers. They are probably not funding it from these sources and it is not clear, if they are, what risk that presents to us. I would imagine, if you were a domestic developer trying to get some financing from a financial institution here, you would want to see the money up-front before you went to your bank and said, 'I have sold 50 per cent of these to foreigners. Trust me, I'm good for it.' That is my rather lengthy summary.

Mr HUSIC: That is excellent. The last thing I would raise—because I am conscious that I am taking up a slice of the hearing—is that the other thing that struck me in talking with the banks and also with some of the other people who have made submissions, like the HIAs, is that there is not really a clear handle on the financing that has been used to secure property here. The only reason I raise my concerns on that is: do you think that we should be able to be comfortable—post-GFC and post the way the GFC was triggered through loans going bad in the United States through a system of financing there that exposed our banks to risk—about the fact that we do not necessarily have a handle on where the finance is coming from? Do you think that the system has put in place enough measures to ensure that we can either keep tabs on the method of financing both here and abroad—obviously it is harder abroad—and the way in which we can lock down risk and lock down our exposure to risk here to our own economy? That is hard question.

Dr Kent : It is a hard question but it is a good question. There are two parts of it. First, let's say there is a foreign buyer who has obtained finance from offshore to purchase a property in Australia. I am imagining, but I do not know—I cannot say with any certainty—that that is likely to be fairly limited, unless that financial institution which is offshore lending that money somehow has some other source of collateral to back that loan, or they have a presence here in Australia and are comfortable that if that foreign borrower were to default that they could get access to some sort of collateral to make good on the loan. Otherwise they are taking a significant risk. But it is their risk. It is a foreign financial institution's risk. So that is one aspect of it. The other side of it is: what exposure might domestic financial institutions and domestic residents, domestic developers, have to foreigners? As I suggested with my earlier answer, I am imagining that they are largely looking for cash up-front. If you were a vendor selling to anyone, if you were to sell your house here, you typically do not extend that finance yourself—certainly not to someone you might consider to be something of a risk. So the money is being provided up-front. Much of that, I suspect, is that the foreigners have that cash already. Is some of it financed? Maybe. To the extent it is financed offshore, though, it presents a risk to the offshore financer rather than the domestic one, I suspect.

Mr HUSIC: Thank you.

CHAIR: Could I follow up on that last point? Do we know, though, that the developer here, who might be financed from offshore through this means, is actually getting the cash up-front? Or are there potential risks with the developments?

Dr Kent : No, I do not think we do. This is the foreign developer who might have got money from offshore from their home jurisdiction—

CHAIR: Or an Australian developer who has got a joint partner with a foreign developer offshore.

Dr Kent : No, they would have to put their own checks and balances in place. Say the domestic developer who has got a foreign partner one way or another.

CHAIR: So some might have a higher tolerance for risk than others, potentially.

Dr Kent : They might, but I doubt, if they have a financial institution backing them with some sort of debt, whether they would have the same tolerance. An Australian bank or financial institution extending to a developer, foreign or domestic, would have to put its own checks and balances in place to make sure—

CHAIR: But that is assuming that they are also additionally getting finance from an Australian domestic institution; and it is conceivable, isn't it, that they potentially are not in those circumstances?

Dr Kent : Possibly if they did not need the finance, but they are the ones taking on the risk.

CHAIR: They are taking the risk but it could, for instance, halt construction and it could cause an economic impact.

Dr Kent : Quite possibly. If you go back to the late 1980s, early 1990s, when we had a problem in the commercial property market here, you got that. You got holes in the ground that were left by developers that had gone bust. Typically what happens is that a developer who earlier had paid a good price for that land somehow gets into financial difficulty and cannot proceed with the development. Someone else will come along and purchase that land and on they go with their own development. The thing you want to avoid is that having knock-on effects on your financial system. It is not clear that the sorts of activities we are talking about here in the residential sector from foreign buyers or foreign developers have implications in that regard. To the extent that it might, what I am suggesting is that the Australian financial institutions would be doing their due diligence and being careful about the risk they are taking on.

Mr HOGAN: One thing this inquiry has reinforced to me, maybe even the majority of the committee, is the lack of good data when we are talking about this issue. When I look at this I think, what do I want to know from this? What is of interest here? You have run a few scenarios whereby if a student is coming to Australia there is a valid reason that someone would come and buy residential property here and in their normal course of business or whatever. I start with the data issue but I want the Reserve Bank's opinion on this, even if we do not have good data on it. We always have been a capital importer. We have people invest in our infrastructure here. We have certainly had some large investments recently in this country in agriculture from Chinese investors and investors from other countries. Do you see that we are seeing capital investment in urban real estate here as an investment? We are considered a safe haven for capital and some other countries may not as a sovereign risk be considered as safe if rules can change quickly. That might be a question the Australian public would be interested in: are we becoming the endgame for residential real estate as an investment by different foreigners because we are considered a safe haven? There are other questions we are looking at such as the impact it has on prices or supply and demand, but do you feel that we are becoming as a residential real estate investment a capital of safe haven in this sphere?

Dr Kent : As you said, I do not think we have any data that allows us to be too precise. My sense is that it has got to have some of that aspect to it. Then I think the question is what is the issue with that. We have long been very open on our capital account. We have borrowed from the rest of the world in various ways to help develop most clearly our mining infrastructure of late but our rural infrastructure, even our manufacturing base, as well as the cities we live in. We have invested a little bit more than we have been able to save domestically for a long time. That is just to say we have been running a current account deficit for the better part of 200-plus years. So this is just part of that and I think it is one aspect. It is not the entirety of it but there is always an investment aspect to it. You are purchasing an asset that you want to hold its value and even generate a return. I think this is the point David made about foreign residents purchasing places that they just sit on and leave empty and hardly visit themselves. We do not know. We think it is limited where we can get this anecdotal evidence. But they are the ones who are losing from that transaction. They have paid some tax, they have paid someone to build this nice property ultimately and they are leaving it vacant. I suspect if they are savvy investors they are not really doing that, so then they are providing that asset to somebody else to rent out, perhaps their own family members. But I think the question is whether there is a particular issue with that.

Mr HOGAN: I am not making a value judgement on that, but in the Reserve Bank's view is this becoming an increasing aspect of this market, if you like?

Dr Kent : I think that it is just part and parcel of globalisation which has brought many benefits and the fact that we have been open to capital for such a long time and this is just one aspect of that. These are their assets and they want a return on them one way or another, whether they view it as a particularly safe return or it is a way of parking money somewhere in a different jurisdiction that gives them some comfort or whether it is just a straight-out financial transaction and they are looking for a return on their asset, it is probably a mixture of all of those.

Mr CONROY: I want to go to page 4 of your submission where you make the point that you look at the average purchase price of foreign and temporary residents. It is concentrated in higher parts of the housing market and that leads you to a conclusion that they are not crowding out first-time homebuyers—which I am certainly not disputing. But you do make the point that that average could be elevated by a few approvals to purchase very high-priced homes. I am certainly not going to hold you to this, but do you have any gut feeling about how much that is inflating the average?

Dr Kent : No. The data does not allow that, which was part of the commentary that we suggested. If it can be done at little cost, you could look into that, if the data that FIRB provides was provided in these different price brackets. For example, they could present values and numbers of approvals in properties less than $½ million, $½ million to $1 million, and so on. That would allow you to do that calculation, but without that I do not think you can make any statement whatsoever.

Dr Orsmond : No, that is exactly right.

Mr CONROY: But it is possible.

Dr Orsmond : All you have is the average price in data. When we came to this issue, what we wanted to do was to take the data as it is and see what we could draw from that. That is one of the conclusions we drew, but indeed the variability of the prices would be helpful additional data.

Mr CONROY: So it is entirely possible that the median price might be well below the average price?

Dr Orsmond : It could be below, whether it is well below it is difficult to say.

Mr CONROY: And the second question I had is around page 5 of your submission where you conclude that it seems likely that there has been some net increase in demand and you go on to talk about supply where you allude to that being the issue. What I have been asking witnesses is: everyone seems to conclude that it is not pushing up house prices in general, but I am trying to explore the possibility of whether it is placing pressure on housing prices in specific locations or markets. I have got your conclusion, and I have got the Credit Suisse report which has concluded that Chinese buyers—and they have done a survey of Chinese buyers—are not likely to be driving up residential property prices nationally though they are a much more powerful force in Sydney and Melbourne. Is that something you think is possible, that we are seeing pockets of housing prices going up, driven partially by foreign investors and temporary residents?

Dr Kent : It is a possibility. The first thing to ask, and it is what we do know from the data and our own liaison contacts and I think that it is obvious to all, is: where is the foreign demand concentrated? It is concentrated in high-density apartments, inner-city areas close to universities. It is that sort of thing. That is where the demand is focused and so that is where you would expect, if anything, for them to have an effect on the price. When we say that we think it has a marginal effect nationwide, it is because in the scheme of things it is a relatively small share of total turnover and prices have been rising in cities and parts of cities around the country which have not had the same sorts of exposures. So it has had a marginal effect, but I think that we have got to keep that in perspective. You are right, it is located in certain parts of inner cities, mostly Sydney and Melbourne.

The second thing though is that you have to ask—and this is the difficulty—what is the counterfactual, what is the net increase in demand? If they are purchasing a place that somebody else really wanted—let us say that it was an investor or somebody who really want that apartment to live in in the city—in the competitive process there is more demand and that pushes the price up a little bit—how much we do not know. But it may be a case of foreign buyers coming in and purchasing new dwellings that have not yet been built by either domestic developers or foreign developers and them saying, 'Yes, we are willing to take the risk. We will build this apartment block. We are adding to supply as well as demand.' Therefore, it is hard to know how much the net long-term effect on the price will be. Other players who might have otherwise bought there might choose to buy somewhere else instead. You cannot really pin it down and be precise.

CHAIR: Can I just ask that question in a slightly different way. We talked about geographical regions but perhaps we can just analyse for a moment whether or not there might be an impact on the price of housing within certain pockets in certain segments of the market. For instance, you talked in your submission about the higher house prices above $1 million. I am not sure if you want to put a particular figure on it, but there may be an impact driving up the price within particular concentrated markets. Could you make some comments on that. Is there an issue that foreign investment within those sorts of markets is actually driving up the cost?

Dr Kent : It is quite possible and likely that there has been some net increase in demand in certain markets. The question, though, is: how much net increase in supply has there been? Supply, as we suggested, takes a while to catch up to demand. It takes time to plan, get approval and get all the financing lined up. Then you need the price signal to bring in that extra supply. You need the prices to go up so that developers will say, 'Now it is profitable. It is worth me building more units in inner-city Sydney or Melbourne.' Then when that supply comes on it can mitigate that first-round price effect. That is why I think it is really hard to judge. You cannot put numbers on this. My own sense is that it has probably had a marginal impact but you cannot say definitively how much. We do know that strong population growth—people coming here on a permanent basis and home-grown population growth put together—is an important force driving up demand. The question is: can we supply enough to meet that extra demand? I think that is the critical question in what is happening to prices.

CHAIR: That is right. That is focused on the new dwelling quotient. There are foreign investors who are residents and have a permanent visa who are able to purchase one existing dwelling. In those circumstances do you think it could be increasing the cost of housing? There is a different demand equation there. You cannot necessarily build something new.

Dr Orsmond : I might take that one. Like Chris said, any net demand in any particular pocket in the first instance is going to have a price effect initially until supply responds, and then there will be less. When you are thinking about whether or not foreign purchases are affecting any particular part of the market, one useful thing to think about is what is happening in all of the other parts of the market where you do not believe there is a large foreign investor aspect. As Chris mentioned in his opening comments, house prices nationally have gone up, but I do not think you see any particular difference in certain pockets. The price increase in certain pockets around the country is not markedly different from the average that has gone up across the whole nation. That suggests that the price increase we have seen over, say, the last year is a phenomenon that is not focused on foreign investors per se, although maybe at the margin there is some effect in some markets. It is more another story that is going on which I think is related to the increase in housing demand by domestic residents.

CHAIR: Is it fair to say, then, that you do not think it is having an impact?

Dr Kent : No, I think it is hard to deny. If you imagine an auction on a weekend where you throw in an extra buyer who is willing to pay a little bit more than everyone else there, if that buyer happens to be foreign, maybe as a temporary resident, and they are buying the single place that they are able to get approval for, it is hard to deny that it would not push up the price. But it depends. You have got your answer in that scenario, but then the economist in me says, 'But what happens thereafter?' If that causes somebody else to say, 'Right; I've got high demand for premium properties,' then, if the land is very limited, yes, it is going to push up the price more—if, let us say, you cannot find new harbour-side or beach-side land that is particularly popular and very pricey. But it can have knock-on effects that do lead to extra supply somewhere that sort of mitigates that effect, and I think that that is the challenge.

Mr CRAIG KELLY: Is the RBA concerned at all about the current rate of house price inflation?

Dr Kent : I think what we have said is: it is, in many ways, not surprising that house prices have gone up, because interest rates are very low, and, as I said, population growth, now at 1.7 per cent a year, is reasonably robust. Those two things help to explain why house prices have gone up. I do not think they have gone up any more than we might have expected, given those forces.

We have said that what would give you concern is having a combination of things happening all at the same time, and that combination would be: a long, sharp rise in house prices; a significant increase in credit; and a significant drop in lending standards. I think that we have seen house prices respond for a time—that has been reasonably significant in some parts of the country, and, at 10 per cent across the country as a whole, that is a reasonable sort of increase in prices. The key is, though: it has led to a small increase in credit, but credit growth remains relatively modest. It has not been backed by a wholesale and significant drop in lending standards, as far as we can tell. And it has not led to a speculative element. But that is what we warn against—we do not want people to be thinking, 'House prices went up 10 per cent last year; it's a sure bet they are going to go up another 10 per cent this year.' That is when you do get risks—when people say that, and say, 'Yes, the best way to make money is to gear up, to get into property; I can't lose,' and then to have financial institutions that are willing to support that and ease their lending standards. I do not think that that is happening yet. It is something you would have to be vigilant for. The one thing I would just note—and we mentioned this in the minutes of the board meeting recently—is: if you look at the house price data, the rate of growth has just come off a little bit in recent months. You would not welcome further strong price growth of this sort, year after year.

Mr CRAIG KELLY: You also mentioned in your submission that supply will catch up with any increase in demand, but, on some of the statistics that I recall seeing, for the last X number of years demand has continued to exceed the growth in supply, so supply is actually not catching up.

Dr Kent : Well, we have had a period where we have not been building much, relative to, let us say, population growth—a period of some years. But we have had a pretty noticeable pick-up in building approvals. We have seen, more recently, dwelling investment picking up, reasonably sharply in the March quarter. That is in line with the fact that dwelling approvals have picked up. They point to some robust growth in dwelling investment in the quarters ahead; we have said that for quite a time now. I think it is manageable. It is understandable—it is in response to higher prices, amongst other things, and, as I said, it is in response to population growth. We just had this earlier period where we did not build as much as we previously had, per head of population, but I think that that is changing now.

Mr CRAIG KELLY: We are looking at factors that increase the demand for housing. Obviously, foreign investment is one, but surely the other one is the level of migration to the country. Could you put the two in some type of context or perspective? Would the levels of migration be a much higher pressure on demand than would foreign investment?

Dr Kent : David might help me out on the numbers in terms of the foreign purchases of housing but—

Mr CRAIG KELLY: If someone migrates to Australia, even if they might bring their capital from offshore, they are considered a local resident purchaser. Surely that would have a greater upward effect on housing prices—with our high level of immigration—than would foreign investors based offshore, coming on.

Dr Kent : If you are talking about people who are coming here permanently that, plus the natural growth of the population, is running at about 1.7 per cent annually. I did a calculation this morning. It is, roughly, not quite 400,000 people a year, if my calculation was right. So that is a pretty significant number—and that is home grown as well as those migrating here permanently. That is pretty substantial and, I would imagine, larger than some of the numbers that we are seeing in terms of foreign buyers who are staying off shore but purchasing, say, an apartment here.

Mr CRAIG KELLY: But would it be true that foreign buyers, compared to that increase in demand, is a very tiny proportion?

Dr Kent : That is my sense, yes.

Mr THISTLETHWAITE: The point that has been made to the committee from a number of submitters is about the data gap. You pointed it out in the first sentence of your submission. What sort of information do you think needs to be gathered that you are not getting at the moment? In particular, who should be collecting it? The point has been made that the Foreign Investment Review Board is principally there to assess foreign applications, not to collect data. Who should be collecting the data, and how should it be collected? Should there by surveys? Is there information that is currently available that is simply not collated but could be?

Dr Kent : I might answer this from the bank's perspective. The thing to say, really, is that our focus is a macro-economic one, but we very much try to understand developments across a range of key markets to help us understand how that macro-economic picture is evolving. One of those is, of course, the housing market. That is an important one for us to understand. The thing that I would stress is that, for the housing market as a whole, we have quite a large quantum of pretty good data. We have reasonable data on prices, at a pretty high frequency. If you really want to—I would urge you not to focus on this—you can get daily house price data. I do not think that is a healthy thing to focus on but that just gives a sense that there is a lot of data on that side of things. We get lots of data, including from the ABS, on total transactions, on loan approvals and on building approvals. The foreign demand is just one element playing into all of that. It is useful, and we spend some time trying to understand that, because it may have important implications for which direction the housing market is heading in. But that is only one small part of that.

I think the main point we would make is that there is reasonably good data, from our perspective, to monitor the housing market as a whole. For example, we can look at house price development, sliced up—even down to regions and within inner-city parts of a city or middle and outer rings of a city. So there is pretty good data, overall, from that perspective.

If you have different questions you want to answer, though, you might need more data on this. But that does not come without costs, because you need to have someone to report that data and someone to collect that data. You need some kind of regulation that says that you must report data in some ways or participate in some extensive survey. So it does not come without costs.

That is why we say, 'If there is data there that is easy to relay—this more granular question we talked about from some of the FIRB data; this slightly higher frequency stuff—and if that can be collected at low cost, why not do that? But for anything else you really have to weigh up the costs versus the benefits. From our perspective, the main point is that we have pretty good data on the housing market.

Mr THISTLETHWAITE: In terms of foreign investment, a number of the submitters—and you say it in your first paragraph: 'the available data, while incomplete'. We need to get a handle on why it is incomplete, how we make it much more complete, who should be doing the collecting and where the problems are that this committee can make recommendations to deal with.

Dr Kent : Can I try to answer that by saying, with reference to when we use the word 'incomplete', it is incomplete to give you a sense of the total magnitude of transactions, let us say. What we have got from FIRB is just approvals; what we do not have are sales. To get a real sense of how important it is, as I said earlier, because the developer can get a building with blanket approvals to sell all of the units in that building to foreigners but then they do not end up selling them there, it can be challenging to reconcile the approvals and turn them into sales. If you really wanted to know this you would need to put something in place that says, 'Have you sold to a domestic resident? Have you sold to a foreign resident?' But that would not come without cost. Who should do that is not really for me to say—and whether you should do it.

Mr THISTLETHWAITE: Are there central banks throughout the world that you think are getting better data than the Reserve Bank in terms of the housing market?

Dr Kent : I do not know for sure, but I have my doubts that they would. We have pretty rich data on the Australian housing market that suits our purposes, and probably to the envy of some other countries. This is a more particular question about one aspect of the market. It is one that is important for us to try and understand, but whether we as a central bank need that level of detail is not clear.

Dr Orsmond : Could I just add one thing on that. In terms of data available in other countries, many other countries do not even have an approval stage for foreign residential investment, so they are not even generating the data that we are at least generating, as incomplete as it may be. More broadly, coming back to the original question, I think our sense is that there is some more data that would be quite useful to be provided by FIRB that has already been collected, and hence the additional cost of providing that data is probably fairly low, both in terms of the timeliness and the granularity of it as well. Also, I think FIRB did provide in their submission some indication of their understanding of the share of those approvals that turn into actual sales, at least for some of the information that gets reported to them—for instance, the off-the-plan development. That is obviously something that is quite useful again. It is data that is being generated by the system right now anyway. So it seems to be a low cost in providing that sort of additional information. Whether one goes beyond collecting data that has already been generated, I think that is where the cost-benefit questions come into play.

Mr THISTLETHWAITE: I agree with your analysis earlier that foreign investment tends to be concentrated in particular localities, particularly around universities. I am not sure I agree with your analysis that those investors are not competing with first homeowners, particularly around the inner city area of Sydney. If you look at some areas around the universities, the new supply that is coming on is predominantly unit investment or apartment developments. Because of the high cost of housing around the inner city, for new homeowners that is their market. They can basically only afford to invest in apartments. I am not sure I share that analysis. For people living around those areas, particularly the university, I suppose the benefit is that the value of their asset is increasing over time because there is demand in that particular locality. But the flipside is that there is also a risk that if there is an oversupply the value of the asset could potentially decrease. Is that a risk that the RBA looks at and is there a way to monitor that? Is there further information that you would need to do a better job at monitoring that?

Dr Kent : In terms of understanding in some sense what the balance is between supply and demand and what the implications of that is for prices is something that we care very much about and look at. We have the ability to look and do at times look at that within particular regions, but we tend not to drill down and get too focused on the nitty-gritty of exactly what sorts of suburbs; although, as I said, we do break down data and look at it in terms of the inner city, the middle rings of cities and the outer suburbs and we have even published data on occasions with that level of detail. That data is there; it is just that you do not have the detail in regard to foreign demand. But we very much care about the balance of supply and demand. What has happened is that demand has picked up. Prices have gone up. Supply is responding, as you would expect. More recently, price growth has just eased back a little bit. So the market is playing out as broadly as you would expect.

Dr HENDY: You have already talked about the issue that I am just about to raise, but I want to get your answer on the record. Some witnesses that we have seen from the property industry at previous hearings have said that they thought most of the purchases by foreigners have been financed through Australian banks. However, when we saw the ANZ last Friday in Melbourne, they had contrary evidence saying that on their own book they knew that foreign investors receive very little financing from them and, indeed, to the extent that it was provided it was mainly Australian expats who are now foreign residents and/or New Zealanders. From your previous answers, you have probably given us your answer to that, but could I specifically ask that question in relation to the other witnesses' comments? Do you agree with the ANZ and their view with respect to the major four banks?

Dr Kent : I would tend to agree with the assessment that, if they are genuinely foreign buyers who are nonresident here, it is going to be pretty difficult for them to get money from a financial institution here. That financial institution will want to know their bona fides, think about their income and make sure that the loan is going to be a sound one. I question the sense that someone from outside of the financial industry says, 'I know this to be true,' because how in the first instance do they know what a person's status is in the first place? Are they recently arrived but otherwise a permanent resident? Are they an Australian citizen? They may not know.

Mr BUCHHOLZ: Can you name me a bank that has knocked back a client with a 50 per cent deposit? This is from your earlier evidence.

Dr Kent : That was in reference to the typical Chinese buyer who is offshore, who is buying in China from a financial institution in China, with a loan-to-value ratio of that sort of order of magnitude; it was not with regard to them purchasing here in Australia. I would suspect that the financial institution in the business of being very careful about who they lend to and how much surety they can have is probably on the money.

Dr HENDY: That is what I thought you would say, and it would accord with what ANZ said. Just lastly, we have also heard evidence which is actually agreed by both the banks and the property developers that the Australian banks to the extent to which they finance, say, a new apartment or townhouse development or whatever, actually impose their own prudential restrictions. There might be foreign investment approval for the whole lot to be sold but they themselves impose their own restrictions to 20 per cent or something like that. You might be aware of that. Have you any role in that oversight? Do you know that APRA does? Or is it just a market mechanism that is playing out by itself?

Dr Kent : We do not have a role in that. It is APRA's responsibility for supervising and regulating financial institutions. I am sorry; I could not answer whether or not they have had a direct role in that sort of thing, but they would at least indirectly have oversight of a bank's approach to the way they lend out money and take on risks, and they would want to make sure the banks have got lending standards in place—and that is one of them—which are sensible and prudent.

Mr BUCHHOLZ: My question is not really a data set based question but goes more towards public opinion. Does the Reserve Bank have a response to the current public opinion or the perceived public concern or the perceived public interest around foreign investment, particularly in the metropolitan markets of Sydney and Melbourne?

Dr Kent : We are attentive and aware of some of those concerns, but I think, as the governor suggested in his testimony back in March, if the real concern is about the availability and cost of housing—and I think that is where the fundamental concern is—as much is anything that is a concern about: can't we build the sort of housing that people, both domestic and foreign, would like to own, at reasonable cost, in reasonable time, located next to decent infrastructure and good transport links? That is the prime question, so it is really a supply-side question much more than a demand-side one, which is where the foreign element comes in.

Mr BUCHHOLZ: You mentioned in your last comment that the FIRB's role is to ensure that it is consistent with the rules. That was your comment. I will just go to the rules and meld that in with another comment that you made, about how we have accurate data on prices—which we do; I think we are very good at that—and we have accurate total approvals and loan approvals. Those were the two other points you made. I suggest that that data is correct as well. We do have a fundamental understanding of our housing market. But, when it comes to the consistency of the rules, when we look at the rules and the integrity of the data that we get from FIRB, I have concerns that the rules are based on the principles of an honesty box system. As a foreign investor, you need to show your hand or declare your interest, but there is nothing that I am aware of that precludes someone from bypassing that process, even though it is required. So my question goes to the integrity of the quality of the data we are getting. If we were capturing the data at the stamps office or at the titles office, consistent with where we get our pricings and other sets of data out of the market, there would be no question of the integrity of data at the moment linking it back to perceived public concern. I am just interested in your comment on the integrity of data.

Dr Kent : My fairly brief response to that is: I intimated that, if what you want to know about is sales and who is making the sale, that is the sort of point at which you would have to think about putting some requirement in. But, as I suggested in my comments and in our submission, that does not entirely come without cost. That is an additional regulation you are talking about, and it is not for us to determine what the benefit and cost of that is, other than to suggest that you need to look at both sides of that. There is a regulation there you are talking about, and there is always a cost in imposing that and enforcing that.

Dr Orsmond : Could I just add that FIRB, on their website—and we have just reproduced it in our own submission here—have a number of monitoring arrangements in place to ensure compliance by people who are purchasing and so on now. Obviously the effectiveness of those is not something that we can talk about, but I think there are a number of procedures to try, at least, to enforce the rules and make people aware of what the rules are.

Mr BUCHHOLZ: This is a public policy issue. How much of Australia is owned by foreign investment in the residential market?

Dr Kent : That is a good question. I could not hazard a guess. You can see that foreign purchase approvals have been in the order of five per cent to 10 per cent of value. Maybe if we hazard a guess through some rough estimates it is half that in terms of the number of properties. As I said, though, that is based on very incomplete data. One thing we have not talked about is the possibility also that foreigners, including temporary residents or foreigners who have not even been residents, offshore buying a new dwelling might sell that.

Mr BUCHHOLZ: That is exactly why we are having this inquiry. When asked about how much of the country is managed by foreign investment, the underlying response is, 'We can hazard a guess.' We do not really know. Thank you for sharing the Reserve Bank's position with us. I would suggest that maybe the Communist Republic of China knows to the square inch how much of their country is owned and managed by foreign investment. So there may be some room for us to improve. Is there a cost there? Maybe the cost might be offset and allay the current concerns of the public in that sector and in these markets?

CHAIR: I think the broad question, in short, is: is there a cost to the collection of the data?

Dr Orsmond : Yes.

Dr Kent : There is some cost to collecting the data. There always is. You need, as I said, some sort of rule and regulation, somebody to collect it and somebody to enforce it. That is not costless.

CHAIR: For completeness, given that we do not often have you before us and we want to make sure that we have all of the information, I need to ask you two final questions. The first relates to a question that I put to the Reserve Bank governor in March earlier this year about Canada shutting down its special investor visa program and whether or not this would lead to more capital potentially flowing into Australia for the purchase of residential real estate. At that time, he said he was pretty sanguine about what was occurring. Has there been any update to the Reserve Bank's position on that particular point?

Dr Kent : No, I really cannot add anything. I do not have anything more to add on that.

CHAIR: The second final question I wanted to ask you is that we heard in your submission that there are obviously differences in other jurisdictions around stamp duties and also capital gains tax that applies to foreign investors. It is quite significant in some instances. We know in Hong Kong and Singapore there is an additional 15 per cent stamp duty. We now in the capital cities of New York and Paris you are looking at a much more significant increase in the capital gains tax that is paid when a property is finally sold. If we were to consider tax as part of the recommendations of this particular committee, does the Reserve Bank have a view on whether or not this would have an impact on foreign investment?

Dr Kent : I cannot speak for the bank as a whole. Would it have an impact? One would imagine that it would at the margins, but I cannot really comment on or provide much insight into questions of tax and fiscal matters, which I think that is. One would imagine it would have some impact.

CHAIR: Do you have a view as to whether it would be a significant impact?

Dr Kent : I could not comment.

CHAIR: Thank you very much for your time. Thank you for answering all of our questions. As always it was a great pleasure to speak with you. We look forward to the next time.