Australia's Housing Crisis: A Foreign Ban Won't Solve the Problem

The Australian government has announced plans to ban foreigners from buying some homes as the cost of living continues to soar. While the intention behind the ban is to make housing more affordable for local residents, the proposed measure is unlikely to have the desired effect. In fact, it may even exacerbate the housing crisis by reducing the supply of new dwellings and increasing demand for established properties.

The ban on foreign purchases will primarily affect new dwellings, established dwellings, and vacant land. Foreign buyers are most interested in new, high-priced, medium and high-density dwellings and inner-city areas of NSW, Victoria, and Queensland (Gauder et al., 2014). This preference for new high-end dwellings in areas with high property densities will be significantly impacted by the ban.

The ban will have several consequences for the overall housing market:

1. Reduced demand for new dwellings: Foreign investors prioritize new high-end dwellings, which will lead to a decrease in demand for these properties once the ban is implemented. This could result in a slowdown in the construction of new dwellings, as developers may be less inclined to build new properties if there is a reduced market for them.
2. Increased availability of established dwellings: The ban on foreign purchases of established dwellings may lead to an increase in the availability of these properties, as foreign investors will no longer be able to buy them. This could potentially ease some of the pressure on the housing market, making it easier for local buyers to find and purchase established dwellings.
3. Impact on property prices: The ban on foreign purchases could have an impact on property prices, particularly in the high-end market. If demand for new high-end dwellings decreases, this could lead to a softening in prices for these properties. Conversely, the increased availability of established dwellings could put downward pressure on prices in that segment of the market.
4. Changes in investment patterns: The ban on foreign purchases may lead to changes in investment patterns, with foreign investors looking for alternative investment opportunities in Australia or other countries. This could have broader implications for the Australian economy and the financial markets.

The ban on foreign purchases of established dwellings in Australia, implemented in 2015, has had a limited impact on housing prices, particularly in high-demand areas like Sydney and Melbourne. Here are some key points to support this analysis:

1. Foreign buyers are primarily interested in new, high-priced, medium and high-density dwellings and inner-city areas of NSW, Victoria, and Queensland (Gauder et al., 2014). The ban on foreign purchases of established dwellings has not significantly affected this preference.
2. Foreign investors value sustainable growth (appreciation) and high rental yield, which is why they prioritize new high-end dwellings in areas with high property densities (Gauder et al., 2014). The ban on established dwellings has not altered this preference.
3. The Government encourages foreign investors to purchase new dwellings to stimulate the economy (Department of the Treasury, 2024c). This policy has not been affected by the ban on established dwellings.
4. The foreign ownership rate in 2021-22 was only 1% (Khadem, 2024), indicating that foreign investment's influence on property inflation is limited.
5. A survey conducted in 2017 found that 64% of Sydney residents agreed that foreign investors were one of the main driving forces in high property prices (Rogers et al., 2017). However, this perception is not supported by the data, as foreign investment's impact on housing prices is vague and not validated.
6. The non-correlation between foreign investment and Australian housing prices is further supported by the fact that cities with low foreign investments, like Perth or Hobart, have also experienced drastic increases in property prices (Yardney, 2024).

In conclusion, the ban on foreign purchases of established dwellings has had a limited impact on housing prices, particularly in high-demand areas like Sydney and Melbourne. The preference of foreign investors for new, high-priced dwellings and the low foreign ownership rate suggest that foreign investment is not a significant driver of housing prices in Australia. The proposed ban on foreigners from buying some homes is unlikely to solve the housing crisis and may even exacerbate the problem by reducing the supply of new dwellings and increasing demand for established properties.