The Impact of Overseas Investors

It’s time for the general public, fuelled by the news media to accept that foreign investment is crucial to maintain and improve upon the state of the Australian investment market.
It’s not a perfect system, and I’m first to admit that it would be much better if everyone could still afford to purchase a home without having to take on a debt that they will likely never be able to repay.
But we can’t have it both ways.
Property markets don’t remain static, they are either increasing or decreasing and as we all experienced during the GFC, the impact of a decreasing property market is felt further than property investors and homeowners. There are major flow-on effects including a reduction in consumer confidence and spending, which results in slowed growth. In Australia we were shielded from this to a certain extent — as has been explained many times — by the mining boom which was still in full flight, but we will also well-positioned to respond due to high levels of foreign investment, most specifically from China.
This Chinese investment served to create a buffer, a more favourable ratio of foreign investment to local investment. The impact of this was that other countries had a vested interest in ensuring Australia responded well to the financial crisis. China kept purchasing coal it didn’t need to make sure that our economy would remain — by global comparison — incredibly strong.
Importantly, real estate (even in Sydney) remains affordable by global standards. Purchasing anything in Beijing is now almost impossible, especially if you want something that a human being could actually live in. By comparison, Australian prices offer a two-pronged benefit — firstly, they present the chance to enter the market using less capital, but they also allow investors to create a financial hedge. Through investing in a foreign country, should a regional crisis take place in mainland Asia, investors will theoretically be sheltered to a certain extent, although there are likely to be significant ramifications for Australia in the event of a Chinese crisis. This hedge also offers a hedge to the Australian market. At the moment, foreign investment makes up only around 15% of overall property investment in Australia. This is a healthy and sustainable percentage which can easily stretch slightly higher or lower without any significant ramifications.
The main thing is that Australia is well-positioned to face an uncertain future with global partners choosing to invest in our country.

 

Access to Capital an Ongoing Issue

Many aspiring Australian property investors, more specifically those defined — sometimes unfairly — as “Mums and Dads,” are failing to begin their property investment journey due to not only a lack of access to capital, but also failing with regards to investment education.

Contrary to what news headlines will have you believe, the average Australian homeowner has access to significantly more capital than they may think. In fact, it’s common practice in the news media to use unfair ratios to describe how Australian families are living below the poverty line. This oversimplification uses the following formula –

value of the home-mortgage+assets=

This leads many to believe that they are struggling and it is this mindset that often drives investment behaviour with regards to the average Australian. What the above formula fails to take into account is that there is often a significant amount of latent and available capital in the property. This equity can be used as ‘realised capital’ to reinvest in a cashflow positive or capital positive strategy that can increase the options available to investors.
The strategy is called debt recycling, and it has been lambasted by critics for supposedly encouraging uneducated investors to risk their property. This statement is of course entirely correct, and absolutely wrong.
No uneducated investor should ever take any form of action that could put them or their family in financial peril, but it’s through education that strategies such as debt recycling become more accessible. You see, the strategy isn’t about risking the family home, (although as with any investment strategy there is an element of risk) it’s about taking an existing resource and maximising it. Latent equity is the equivalent of having money in the bank that depreciates in value over time. Through market fluctuations, inflation and economic variables, the value of money that does not appreciate in value reduces over time. This isn’t to say that your property won’t appreciate in value, but the equity you have already earned will not. Accessing that equity does not impact directly upon the value of the property as these are two separate things.
Australian investors should educate themselves as to the available resources they have, and the options available to them. Through debt recycling and other available strategies, the average Australian homeowner can put themselves in a position where they are in the driver’s seat with regards to their own financial position.