Australia has long been an attractive destination for foreign investment into residential property. The stable economy and political landscape, tourism, education, immigration and health are all key drivers that attract investment from offshore buyers. However, for many, the biggest draw is the lifestyle Australia offers. The warm, sunny climate combined with the rich and diverse culture appeals to buyers from all over the world.

Sophie Chick, Head of Residential Research at Savills Australia and author of Savills Overseas Buyer’s Guide 2017 looks at why the demand from overseas buyers is concentrated in Sydney and Melbourne

Sydney

Universally recognised as a global city, Sydney is the capital of New South Wales and has the largest population of all Australian cities. Over the past 10 years, the population has increased 18.2 per cent to over five million people. Forecasts suggest this trend will continue and by 2036, the city’s population will reach 6.4 million.

Property prices in Sydney have increased substantially over the past 10 years in common with many other cities around the world. The market has benefited from strong economic conditions, low interest rates and an imbalance between demand and supply. More recently, while Sydney’s property market continues to see some of the strongest growth in Australia, the rate of growth has slowed.

The slowdown can be partially attributed to the regulatory measures to slow the amount of bank lending to investors that were introduced in late 2014 and March 2017. In response, banks tightened lending criteria for property investors particularly for foreign investors, which is likely to lead to the proportion of bank lending to investors reducing and may contribute to an easing of house price growth. However, given the historically healthy returns, tax benefits and the limits placed on superannuation contributions, investing in residential property is likely to remain an aspiration for many.

More significantly, the slowing price growth reflects stretched housing affordability across Sydney. As both first home buyers and existing home owners need to either stretch their finances further or save for longer there is little potential for owner-occupier demand to push prices up at the same rate as seen previously.

Foreign investors also face higher entry costs to the market in NSW with a four per cent stamp duty surcharge on foreign property buyers in 2016, which increased to eight per cent on 1 July 2017. However, the impact of this is mostly confined to the new build market given foreign buyer restrictions.

Overall, it is expected that the rate of price growth will slow, with prices remaining on a ‘high plateau’ perhaps for some time. However, as Sydney’s population continues to increase and infrastructure projects complete the long-term prospect for the residential markets remain sound.

Melbourne

A highly regarded city, Melbourne’s charms have been globally recognised. The quality of life experienced in the city attracts high calibre employees who contribute to the strong local economy. Melbourne is the capital city of Victoria, which accounts for almost a quarter of economic activity in Australia, second only to NSW.

VIC is one of the fastest growing states in Australia. In the last 10 years, the population of Melbourne has increased by nearly one million people to 4,750,000. This has significantly added to the demand for real estate in the area.

The strong population growth experienced is anticipated to continue with some estimates suggesting the city will overtake Sydney to become the largest city in Australia over the next 20 years. Unlike Sydney, Melbourne does not have physical barriers, such as mountains and national parks, constraining expansion. This means Melbourne's growth is less restricted.

Melbourne has seen strong growth in property values over the past decade, second only to Sydney, as prices are supported by robust jobs and population growth. However, much like Sydney, the property market in Melbourne faces a number of challenges.

The new mortgage lending regulations, which target investors, are a national policy and there is an additional seven percent stamp duty for overseas buyers. Like Sydney, the impact of this is mostly confined to the new build market given foreign buyer restrictions.

A significant difference when compared to Sydney is the price point. While property affordability in Melbourne has been stretched, prices remain on average 30 per cent lower than in Sydney.

Overall, Melbourne can be described as a high demand and high supply market. There has been much rhetoric surrounding an oversupply of units, few appreciate the relative population growth performance. In line with Sydney, property price growth is likely to slow this year, with prices remaining on a ‘high plateau’ perhaps for some time. However, as Melbourne’s population continues to increase, the long-term prospect for the residential markets remain sound.

Conclusion

While there have been recent policy changes directed at international buyers, they are by no means unique to Sydney and Melbourne. Many other international cities have introduced similar taxes and so the comparative cost of buying, owning and selling in Australia remains competitive on a global scale.

We expect our key cities to remain attractive investment destinations. Sydney and Melbourne will continue to provide the security, freedom and space together with a high quality of life that is so attractive to foreign buyers who seek their own piece of the Australian dream.

Read more about offshore demand for real estate:

What do China's new capital controls mean for Australian real estate?

Australia still a property hot spot for Chinese buyers

2016 Census: what does it tell us about housing in Australia?