Demand from foreign buyers to surge in next decade, says global head of residential at Knight Frank

Australia’s housing market has seen nothing yet when it comes to demand from foreign buyers, according to a senior executive at one of the world’s largest property consultancies.

While the government’s crackdown on foreign investment is taking its toll on the property market, it’s still an “affordable” destination for the world’s high-income earners, says Lord Andrew Hay, global head of residential at Knight Frank.

“Australia is still seen as a very attractive location but clearly the government are taking a more proactive role in how they try and control property values, because of the affordability question and quite rightly so,” he told Domain.

Lord Hay was in Australia to promote Knight Frank’s 12th annual Wealth Report, which provides statistics, analysis and predictions to the world’s high net worth individuals (HNWI) and ultra high net worth individuals (UHNWI).

For the second year in a row the report ranked Sydney as the 11th most desirable city for HNWIs to live and invest in, with Melbourne not far behind in 20th position.

However, over the past two years Lord Hay said the number of overseas HNWIs entering the Australian market had dropped by 51 per cent, while increasing 49 per cent in the United States, where there are fewer controls.

“Australia, though it is still sought after, is looking less attractive because of the cost on entry into the market,” Lord Hay added.

Foreign buyers have been hit with hikes to stamp duty and land taxes in NSW, while nationally vacancy taxes have been introduced, as well changes to the capital gains tax and restrictions stopping foreign buyers from purchasing more than 50 per cent of new developments.

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“I sense [the government] has probably overdone it a little bit,” Lord Hay said. “The best market you can have in the world is when you’ve got two-thirds domestic demand and one-third incoming overseas demand because you do need some of that to drive the market.”

Lord Hay said both Sydney and Melbourne had shown a slight easing in their prime property values – the top 5 per cent of the housing market – but still ranked highly in Knight Frank’s latest Prime Global Cities Index, which tracked price growth for the year to March.

Sydney and Melbourne claimed ninth and 10th place thanks to increases of 8.7 per cent and 8.3 per cent, but annual growth was down on the previous year in both cities and in Brisbane – which ranked 19th with 3.6 per cent annual growth.

Perth, which is recovering from “three really grim years” was the only city to see an increase, moving from negative growth to 2.8 per cent annual growth.

“Sydney and Melbourne weren’t even in the top 20 a few years ago,” Lord Hay said. “Every year I come here and say they’re going to get better and better because on a global context they are such great propositions.”

He noted the pull back in price growth was an “encouraging indicator” particularly for Sydney, which has previously recorded unsustainable double-digit growth.

“Growth between 5 and 10 per cent per annum is quite healthy and sustainable,” he said.

While he predicts Sydney will continue to nudge it’s way up the ranks of the top 10 cities, Lord Hay predicts it won’t be able to overtake too many more.

“If it does it means that it’s going to become hideously expensive and you don’t want more Monacos and places like Hong Kong.”

Knight Frank’s latest quarterly data shows while $US1 million ($1.3 million) would only buy about 15 square metres of prime property in Monaco, 22 square metres in Hong Kong and 25 square metres in New York, it would buy 49 square metres in Sydney, 91 in Melbourne, 117 in Brisbane and 126 in Perth.

“On a global context Australia looks affordable for [prime real estate],” Lord Hay said. “It’s really good value.”

He noted while prestige property agents who had it “too easy for too long” may be feeling the impact of the foreign buyer crackdown and concerned by China’s crackdown on capital outflows, there would always be plenty of demand – particularly from China, which will remain an incredibly important market for Australia.

“You’ve seen nothing yet. The surge of Chinese investment is only going to increase in the next 10 years because there’s going to be a generational shift of wealth,” he said. “They also have about 130,000 new millionaires each year which is massive … and more than any other nation they’re looking to invest offshore.

“I think you’re going to see a much greater surge of demand and how the Australian government reacts to that is going to be key in the coming decade.”