Property watchers continue to question the bizarre set of circumstances that has led to house prices continuing to rise but loans to finance property purchases falling. The ABS reported that house prices for the March quarter increased by 4.8% (and were up 20% for the year) while RP Data-Rismark’s index found national prices rose 12.5% to February, with Melbourne medians rising by 18.7%.

Meanwhile, data indicates lending to “owner-occupiers” dropped by 3.4% in March, the eighth decline from the past nine months. The fall was most pronounced in finance for new houses, which recorded a 7.3% fall. First home buyer commitments have been hit especially hard since the removal of the federal government’s first home owner’s grant, with lending to first home buyers plummeting by 67% since October 2009.

But while the data appears contradictory, there are several reasonable explanations for the discrepancy that has baffled so-called real estate experts and economists.

First, while the number of loans being made has fallen, the value of financing commitments actually increased by 3% in March. So while lower spending first home buyers have been effectively “priced out” of the market, investors and more mature buyers have not only picked up the slack, but have continued to bid up the price of properties.

Second, there is also the possibility as pointed out by Ben Hurley in the Weekend Financial Review that “some people secured finance a year ago, but haven’t been able to get their hands on a house. Their loan approvals would have shown up in last year’s data when there was indeed a spike”.

Most pertinently, however, has been the impact of foreign buyers, possibly the least understood area of the market. Many commentators have noted that the impact of foreign buyers has been negligible, with Foreign Investment Review Board figures claiming that temporary residents were responsible for only 2% of purchases. This was the argument proffered by Crikey’s Bernard Keane, who noted back in March that:

“2007-08 can give us a sense of scale. Data from RP Data-Rismark provided by Christopher Joye shows there were 402,734 home sales in 2008. Those 7171 applications form less than 2 per cent of sales.  But when it comes to value, the significance of foreign investment is greater: the $16.77 billion was part of a $166 billion market.

The problem with that argument is that the 2007-08 figures are completely irrelevant. This is because the federal government overhauled the rules for foreign buyers of Australian property in December 2008 — six months after the period to which that data relates.

More pertinent is what has happened since early 2009, when the new laws came into effect. While “evidence” is merely anecdotal, it points to a surge in foreign ownership of Australian residential property.

The changes to foreign investment made by the federal government in December 2008 included the ability for Australia’s 300,000 temporary residents to purchase a property to use as their principal place of residence (previously, temporary residents were hamstrung by the requirement that properties purchased must cost less than $300,000). Less well publicised was the law that allowed foreign owned companies to “acquire second-hand dwellings for the purpose of providing housing for their Australian-based staff” so long as “the company undertakes to sell or rent the property if it is expected to remain vacant for six months or more”.

The latter requirement had the effect of allowing most “cashed-up” foreign persons to purchase Australian property with virtually no real limitations. The creation of a company takes a couple of hours a few hundred dollars (or more likely, an accountant who can do it all for you). Once that company purchases a property, there is virtually no way that FIRB are able to (or would have any interest in) ensuring that the property is used only for housing for Australian-based staff. (There is obviously no practical way for FIRB, nor any other regulatory body to physically determine whether that rule is being adhered to.) And in any event, second part of that rule relies on whether the foreign company “expects” the property to remain vacant — a completely illusory and absurd requirement, which can better be described as appallingly drafted loophole.

Since the FIRB law changes, anecdotal evidence of the influence of cashed-up foreign buyers is rife. Some agents in Melbourne’s leafy suburb of Balwyn are believed to be conducting auctions exclusively in Mandarin, while other fashionable suburbs, often located in desirable school districts, are in part believed to be 80% Chinese-owned (it should be noted though, that some of those owners are nationalised Australian-citizens of Chinese descent).

In September 2009, the Sunday Age reported that in the exclusive Melbourne’s bayside suburb of Brighton “more than 40% of sales were made to Chinese interests”, with a prominent real estate agent noting that “[overseas investors] buy them to land bank, not to rent them out. The houses just sit vacant because they are after capital growth”.

The minister now responsible for the foreign investment rules is the bumbling assistant treasurer, Nick Sherry. Sherry stated on April 14 that the government was unable to confirm whether it was actually collecting data on foreign purchasers of residential property or whether it was set to tighten foreign ownership rules. Ten days later, FIRB announced that it was toughening its stance on temporary residents purchasing property, requiring them to inform FIRB and receive approval prior to any purchase.

The “foreign company” loophole, however, remains open.