The Effect of Foreign Demand on Residential Property Prices: Evidence from Australia

• Author: John Swieringa,Chris Wokker
• DOI: http://doi.org/10.1111/1467-8462.12346
• Published date: 01 March 2020
• Date: 01 March 2020

The Australian Economic Review, vol. 53, no. 1, pp. 35–49 DOI: 10.1111/1467-8462.12346

The Effect of Foreign Demand on Residential Property Prices:

Evidence from Australia

Chris Wokker and John Swieringa*

Abstract

This study estimates the impact of foreign

demand for Australian residential real estate

on property prices. Using postcode‐level

administrative data and fixed‐effects regres-

sion techniques we find a positive relationship

between foreign investment approvals and

price growth. Our analysis suggests that, on

average, foreign investment contributed be-

tween $80 and $122 to quarterly price growth

in Sydney and Melbourne between July 2010

and March 2015. This is a small proportion of

the increase in property prices over the

period.

1. Introduction

Residential p roperty prices i n Australia h ave

risen considerably in recent years. This has

coincided with a su stained increa se in foreign

demand for Australian property. Similar trends

have occurred in other OECD economies and it

is widely believed that foreign demand has

contributed to the increase in prices, particu-

larly in international cities where foreign

demand appears to be concentrated.

1

But there

is little evidence to support the view that

foreign demand has led to higher property

prices. The few studies that have sought to

quantify the impact of foreign demand on

property prices have relied on data which may

not accurately reflect foreign demand for

residential real estate or are poorly disaggre-

gated through time and space.

In contrast, this article makes use of monthly

and quarterly, postcode‐level administrative data

of foreign demand for residential real estate in

Australia. When combined with postcode‐level

property price data, we can consider the impact

of foreign demand in more detail and with more

confidence than is allowed by previous datasets.

We develop a fixed‐effects model of postcode‐

level price growth using foreign investment

approvals data as the main explanatory variable,

and estimate the sensitivity of prices to foreign

demand.

1.1 Background

Australia has run a current account deficit

almost continuously since the Australian

* Wokker and Swieringa: The Australian Treasury,

Langton Crescent, Parkes, ACT 2600, Australia.

Corresponding author: Wokker, email <chris.wokker@-

treasury.gov.au>.

This paper has benefited from the assistance of Ross

Williams, Robert Breunig, Tanuja Doss, Emma Schultz,

Markus Brueckner, Glenn Otto, Sam Hill, Michael

Kouparitsas, Yi Yong Cai, Angelia Grant, Linus

Gustafsson, Luke Willard, Hamish McDonald, Nigel

Ray, John Lonsdale, Roger Brake, Sina Grasmann,

Nicole Merrilees, Derrick Calder, David Earl and

Sriram Shankar. We also thank the University of New

South Wales and seminar participants at the Australian

National University’s Research School of Economics, and

the Victorian Treasury/Productivity Commission Seminar

Series. This research did not receive any specific grant

from funding agencies in the public, commercial or not‐

for‐profit sectors. Declarations of interest: none. This

research does not necessarily represent the views of the

Treasury or the Australian Government.

© 2019 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd