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House prices rose by an average of 64% in Sydney and Melbourne in the decade from 2004 to 2014. At the same time foreign investment proposals in developed real estate rose by almost tenfold. This correlation led to a lot of anecdotal stories of Chinese buyers driving up prices and to a Parliamentary Inquiry.

How much can we attribute the decade-long housing boom in Sydney and Melbourne to foreign buyers? The numbers are hard to find and a little rubbery, but our best econometric estimate is that about one quarter of the growth in house prices in Sydney and Melbourne can be attributed to foreign investment.

This means that if foreign investment had been steady over the period, average house prices would have grown by about 50% compared with the actual growth of 67%. In the other capital cities, by the way, the growth in house prices was much less and it was not possible to find any econometrically significant effect of foreign buyers.

This amounts to a modest effect of foreign investment on house prices in Sydney and Melbourne. The hype about Chinese buyers driving up house prices appears to be overstated – at least in terms of the effect on average house prices – there may have been more significant effects in certain locations.

The quality of data however is a failure of public administration. The Parliamentary Inquiry essentially came to this conclusion. It found that there is no accurate data on foreign investment in Australian real estate and therefore “no-one really knows how much foreign investment there is in residential real estate”.

The Inquiry also noted there had been no court action by the Foreign Investment Review Board (IRB) since 2006 in relation to foreign real estate investment. The Australian Taxation Office has however moved since then to force the sale of a property bought by a foreign buyer without government approval.

The law prevents foreign citizens from purchasing established housing for their own homes or as investment properties, except for one or two narrow exemptions. Clearly there has been inadequate monitoring of purchases to enable this law to be enforced. However if the concern is about house prices and the effect on affordability, then the role of foreign purchases is not at all clear.

If foreigners buy a house to rent out to someone who is already in the housing market such as a non-citizen student in Australia, there is no net increase in the demand for housing and therefore no pressure on house prices. Nor is there any net impact on housing demand and therefore on prices if foreign buyers eventually become foreign sellers. And again, if foreign buyers eventually become permanent residents their purchases represent a shifting forward of housing demand rather than a long run increase in housing demand.

All of which is to say that simply looking at foreign purchases of real estate does not give us a very accurate guide as to the net impact on house prices.

Then there is the tenuous link from house prices to housing affordability. First home buyers generally purchase the cheaper dwellings and established rather than new dwellings, both of which are housing categories where foreign investment is less evident. In any case, other work by the Reserve Bank of Australia finds that house price growth over the past 30 years can be largely explained by fundamental factors such as financial deregulation, the ability of housing supply to respond to demand, and population growth driven by immigration. This suggests that foreign direct investment may have played relatively minor role in explaining house price growth.

If the public policy concern is more about housing affordability, then policies that aim to boost housing supply and that address tax and retirement income policies favouring housing over other asset classes would be more effective than a clamp-down on foreign real estate investment.

Some people seem to worry not so much about housing affordability but about foreigners gaining control over Australian real estate assets. This is hard to fathom because when foreigners buy an asset in Australia, whether it is a real asset like property or a financial asset like shares or bonds, there is no transfer of wealth to foreigners. Indeed quite the reverse – if foreigners are willing to pay more for our assets than any Australian citizen, this cannot be a loss of wealth to Australia.

Despite all of these qualifications and complications, we need to know more about foreign purchases of residential real estate. The Parliamentary Inquiry’s recommendation seems sensible: to establish a national register of land title transfers that records the citizenship and residency status of all purchases of Australian real estate.

Authors: The Conversation Contributor

Read more http://theconversation.com/was-the-housing-boom-in-sydney-and-melbourne-driven-by-foreign-buyers-51389

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