Should Australians be taking their home loans offshore?

We often hear about foreign nationals coming to Australia and buying up real estate. But what about those Australians who buy properties in other countries

This is particularly tempting due to the continuing strength of the Australian dollar, which remains high despite recent drops. Back in 2010, the International Property Investment Network’s Peter Mindenhall told Karma Resorts that “with the Aussie dollar as strong as it is, the traditionally ‘well developed’ and ‘stronger economies’ like the US and the UK are now very attractive indeed.”

However, buying offshore isn’t without its risks. Fairfax Media reported on November 27 on the predicament faced by Australian property buyers in Phuket’s luxury Chom Tawan district. A Thai court has ordered the sale of homes owned by more than 40 buyers in the residential development, unless Napawan Asia Limited, the project developer, pays back millions of dollars to the Industrial and Commercial Bank of China. 

The risks of buying offshore

This case illustrates some of the risks of becoming an offshore real estate buyer, despite the fact that it’s now easier than ever. Thanks to the internet, it’s not only possible to easily peruse foreign real estate listings in the hunt for that dream offshore property for investment or sea change, it’s also simpler to carry out the necessary communications with vendors, lawyers and builders — as well as any research around the local real estate market. 

At the same time, dealing with unfamiliar contacts can leave you vulnerable, as the Australian buyers in Phuket learned. What seems a good deal on paper can leave buyers in danger of losing it all if dealing with an unreliable or even unscrupulous developer or real estate agent. 

There are other potential risks, too. Depending on the situation, you could be dealing with a product you’re not seeing in the flesh, leaving you unable to check whether there are any repairs or maintenance issues with the property. If the property is being built, you’re also unable to regularly review progress. 

Along with this, there’s the issues around navigating a confusing, foreign tax and legal system, factoring exchange rates into your cost analysis and the troubles with trying to be a foreign landlord. Managing a property from a different state can be hard enough, let alone from a different country. 

Of course, any purchase is about balancing the potential risks and benefits. The financial advantages of buying offshore might offset these points.

How affordable is it overseas?

At first glance, it seems buyers can benefit greatly from applying their home loan calculator to foreign housing. The Organisation for Economic Co-operation and Development has figures for the price-to-income ratio of housing in various countries, a typical measure of the affordability of housing for the average buyer. The higher the ratio, the greater the value of housing in a country.

As of the time of writing Australia had the fourth highest ratio of house prices to income, with a value of 29.4. New Zealand and Canada were marginally higher, with ratios of 31.9 and 30.5, respectively, while Belgium streaks ahead with 46.6.

By contrast, take countries at the bottom end of the scale. South Korea has the most favourable ratio, at -39.4, while Japan trails close behind with -38.4. Meanwhile, the United States sits at a value of -9.8, and Greece with a ratio of 2.8. 

Some of these places are also more advantageous in terms of the cost of lending. While the World Bank puts Australia’s real interest rate at 6.5 percent, Japan (1.9 percent), South Korea (3.9 percent), the US (1.7 percent) all report lower values. This is even the case in countries like Malaysia (4.7 percent) and Thailand (4.1 percent). 

Of course, the price of borrowing for a house isn’t the be-all and end-all. The US and, especially, Greece are undergoing economic instability which makes them less reliable areas to buy a property you’ll be paying off for many years. It’s also important to factor in the cost of living itself, particularly if you’re planning on moving permanently. 

The offshore buyers checklist

If you do decide you want to buy overseas, you should consider a number of factors:

• Get legal and tax advice for your country of choice before making any decision
• Do research on the country’s property market, as well as the local area you’re investing in
• Carry out a thorough background check on the reputability of anyone you’re dealing with, such as developers and real estate agents
• Keep up with movements in the exchange rate

While the process is certainly tricky, if you’re determined to buy offshore, these points will help you avoid some of the bigger pitfalls.

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