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Are foreigners taking over the Aussie housing market?

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If the media is to be believed, the reason the real estate market is so hot is due to foreigners, especially Chinese, turning up with blank cheques buying everything in sight, writes real estate expert Henny Stier.

Apparently Australians are no longer able to get a foothold in the housing market because the playing field is not level. How much of this is true and how much of this is sensationalism and headline grabbing? Let’s explore the facts as they currently stand.

Who can buy what? 

Property buyers are classed into three categories based on their residency status in Australia. ‘Australian Citizens and Permanent Residents’ have no restrictions and can buy any type of property and as many as they wish. Then there are foreigners who have no residency status in Australia at all. ‘Foreigners’ are restricted to only buying brand new or off-the-plan properties, or vacant land for immediate development. Many people are not aware of this rule and the fact that foreigners are not allowed to buy secondhand properties at all. The last category of property buyers are classed as ‘Temporary Residents’. These include those on student visas of more than 12 months or those who have applied for Permanent Residency and are on a bridging visa, for example. Temporary residents may acquire a secondhand property, but it is restricted to one only and must be used as their residence (home) in Australia. There is a condition which stipulates that the temporary resident must sell the property when it ceases to be their residence. Temporary residents are not permitted to buy established dwellings as investment properties. Temporary residents are permitted to buy brand new or off-the-plan properties to occupy or as investment. Anyone who is not a Citizen or Permanent Resident must apply to the Foreign Investment Review Board (FIRB) to buy in Australia. Such proposals are normally approved without conditions.

Are Chinese buyers really dominating?

There is no doubt that many people of Asian heritage are seen each week at Open Inspections and auctions everywhere in Sydney, and certainly the North Shore. It is easy to jump to the assumption that anyone looking remotely East Asian must be a ‘rich Chinese’. The reality is that Asian buyers are easy to spot because they look different in a crowd of Caucasians. Nobody really spots the Kiwi or the Brit – but Asians do stand out in physical appearance. However, it is often the case that the Asians may be second or even third generation Australians. Even if they are newly arrived immigrants who do not speak English, they are as entitled as any other Australian citizens or long-term residents to buy a property. In addition, many people have difficulty identifying the different Asian backgrounds and lump Koreans, Japanese, Singaporeans, Malaysians, Vietnamese, Thai, Indonesians, etc all as ‘Chinese’.

Having said this, as someone who works in real estate and a Chinese speaker, I know for a fact there has been a significant increase in buyers from mainland China. Many factors have contributed to this rise: cheap Australian dollar, increasing middle class, fear of future instability in China and, therefore, the need to invest money offshore, seeking a safe haven for the family by having children educated in Australia, etc. For many mainland Chinese buyers, buying a property is much more than just about having a roof over their head. It is about an insurance policy – and something they are willing to pay a premium for.

So what is the problem?

The main issue is the lack of a tracking system to ensure the rules of foreign investment (above) are being adhered to. And there have been many claims of foreigners breaching these rules. However, last year’s parliamentary inquiry heard that the FIRB had not prosecuted a single case since 2006, rendering it essentially ineffective.

What does the government propose to do?

Last Wednesday, The Treasury released a proposal on Strengthening Australia’s Foreign Investment Framework. It is a discussion paper which is open for public comments until 20 March 2015.

This discussion paper forms the basis of the government’s consultation on reforms to the foreign investment framework. The proposed reforms include:

  • increasing compliance and enforcement activities around foreign investment in residential real estate through the creation of a specialised investigative and enforcement area within the Australian Taxation Office; and
  • introducing new civil penalties and increased criminal penalties for foreign investors and third parties who breach the foreign investment rules.

The government is looking at setting up a new register of foreign investors in both residential and agricultural real estate, with fines of up to 25 per cent of the value of the property for any breaches.

Consideration is also being given to the introduction of an application fee on all foreign investment proposals – this is expected to raise $200 million a year. This is not to act as a deterrent to foreign investment, but to fund the costs of better data collection, screening, compliance and enforcement activities. A more sophisticated data matching systems drawing information from various government agencies, such as the Treasury, Tax Office and Immigration, is desperately needed and needs to be funded.

For residential real estate and rural land acquisitions, the proposal is for a fee of up to $5000 that would apply to properties valued under $1 million. Applications to purchase a property equal to or greater than $1 million would be subject to a fee of up to $10,000. This would then increase in increments of up to $10,000 for each additional $1 million in property value. (e.g. For a property up to $2 million, the fee payable would be up to $20,000; for a property up to $3 million, the fee payable would be up to $30,000, etc.)

The proposed fees are much higher than the $1500 recommended by last year’s parliamentary inquiry into foreign investment.

Is this going to work?

Foreigners who have the discretionary funds to purchase a property in Australia will probably not even blink at needing to pay this extra fee. So this is certainly a good fundraising opportunity for the government.

However, in addition to better enforcement of the current FIRB restrictions, there needs to be a more rigorous review of the current stamp duty structure. A very good model to learn from is the tiered stamp duty that Singapore recently phased in. To kerb overwhelming foreign interest in Singaporean residential properties which skyrocketed prices, the government introduced differing levels of stamp duty payable by Citizens, Permanent Residents and Foreigners. What is particularly interesting about the Singapore model is that additional stamp duty is charged to those who own more than one to two residential properties. There is also special stamp duty on properties sold within three years: 10 to 20 per cent of purchase price, depending on when sold. This was intended to prevent speculative buying.

So, while the proposed enforcement reforms are much needed, the separate question which needs to be asked is whether the current rules are effective enough?

Everyone seems to have an opinion on foreign investment. We’d love to hear yours in the comments section below…

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