A new paper released by the Treasury ahead of the Reserve Bank’s decision to keep interest rates at 1.5% argues that foreign buyers are not to blame for Sydney and Melbourne’s soaring property prices.

The paper, entitled Foreign Investment and Residential Property Price Growth, was based on five years of research up to mid-2015. The Treasury asserts that foreign buyers had only accounted for “a small proportion of the increase in property prices” in Australia in recent years.

Instead, demand from local buyers—driven by factors such as housing supply, interest rates, and financial regulation—had a greater impact. The paper also noted that the level of foreign demand for Aussie homes had increased strongly in recent years.

Foreign demand was mainly driven by Chinese investors, who accounted for approximately 70% of foreign investment approvals in early 2015, up from 50% in mid-2010. Despite this demand, the foreign impact on Aussie property prices (felt primarily in Sydney and Melbourne) has been minimal.

The paper’s statistical analysis determined that for a typical postcode in Sydney and Melbourne, the increase in house prices attributable to overseas buyers equated to $80-$122 on average in each quarter. “[This] is small when compared to the average quarterly increase in property prices of around $12,800 in Sydney and Melbourne during the study period,” the report said.

Moreover, despite Melbourne receiving more foreign investment approvals than Sydney over the study period, price growth in Sydney has been much stronger than in Melbourne.

The paper argues that offshore investors, who are often blamed for pricing Aussie first-home buyers out of the market, had little to do with the housing affordability issue. This was because most offshore investors purchase new homes whereas entry-level domestic buyers typically seek established properties.

“The effects of foreign investment are often poorly understood, particularly with regards to residential real estate,” the paper said. “Australia’s policy for foreign investment in residential real estate aims to increase Australia’s housing stock.

“As such, applications from nonresidents to purchase new properties are usually approved without conditions, but nonresidents are prohibited from purchasing established dwellings. The majority of approvals have been granted for investment into new...dwellings [which] suggests that foreign demand is being channelled into increasing the property supply, as intended.”