Lies, damn lies, and foreign investment statistics

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ScreenHunter_4459 Oct. 13 10.08

By Leith van Onselen

James Laurenceson, Deputy Director and Professor from the Australia-China Relations Institute at Sydney’s University of Technology, has posted an article in The Conversation lambasting anyone that dare criticise foreign investment in Australian residential real estate. Let’s take a look at Laurenceson’s main arguments:

Despite valiant efforts by commentators such as Bernard Keane and Michael Pascoe to slay claims that Chinese buyers are making it harder for ordinary Australians to enter the housing market, the notion refuses to die. It is the “zombie idea” afflicting the Australia-China economic relationship…

All foreign investment in Australian real estate requires approval from the Foreign Investment Review Board (FIRB).

According to FIRB, over the period 2009-10 to 2012-13, approvals for Chinese investment in Australian real estate totalled $16.6 billion.

At first blush this seems an impressively large figure. But it is actually less than 10% of the total value of foreign investment approvals in the sector…

The scale of Chinese investment seems again smaller when viewed against the size of the market. In a report earlier this year, the Reserve Bank of Australia (RBA) observed that total foreign investment approvals in residential real estate have historically only been around 5-10% of the value of home sales. Chinese approvals are just a proportion of this percentage.

It is also important to keep in mind we are talking about approvals here, not purchases. This means FIRB data overstate the true value of foreign investment…

Also don’t forget that FIRB data is gross, not net…

Citing preliminary FIRB data from the first three quarters of 2013-2014, the Commonwealth Treasury noted a sharp jump in foreign investment approvals over the previous year, particularly from China. But as the RBA shows, this still only takes the value of total foreign investment approvals to around 12-13% of total sales…

One wonders whether Laurenceson has been living under a rock over the past six months. Citing the official FIRB data, and using it as “evidence” to debunk the claim that foreign investment is pushing up home values does not pass scrutiny.

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Liberal MP and chair of the parliamentary inquiry into foreign investment in Australian real estate, Kelly O’Dwyer, has confirmed that FIRB’s surveilance and enforcement of non-resident property transactions has been totally inadequate, and revealed that the official FIRB data on foreign property investment cannot be trusted:

…we’ve heard some anecdotal evidence that suggests that there are people who are deliberately contravening the rules. The problem is of course is that those people who are deliberately contravening the rules are simply not going to the Foreign Investment Review Board for approval.

…there are a number of people who are simply not going to the Foreign Investment Review Board for screening. And if they’re not going to the Foreign Investment Review Board for screening, they simply don’t think that there is any possibility that they’ll be caught. They think that there’s probably not a strong compliance regime in place, and I have to say, I think our compliance and auditing regime is not as strong as it needs to be.

…we need to have better data, better information, which is another reason why one of the key recommendations that our committee will be making is to have a national register where, at the transfer of land, you actually understand who is purchasing that residential property and that that data can be matched against all sorts of other data, including data from the Immigration Department, where you have, for instance, temporary residents who might’ve left the country and who, under our current existing foreign investment framework, need to sell their property within three months of leaving – some of those people are not doing that and the data isn’t being matched, which means those people, at the moment, are not being caught…

And in a 7.30 Report interview last month, Ms O’Dwyer reiterated that the data surrounding foreign property investment is dodgy:

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“There needs to be a national register so that I can answer the question: How much of our residential retail market is actually owned by foreign investors? At the moment today, I cannot give you that response”..

Put simply, Laurenceson’s citing of the official FIRB data as “evidence” lacks credibility, since accurate data is not being collected on the extend of foreign investment in Australian property.

Back to Laurenceson:

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Issues of scale aside, Chinese investment has the effect of increasing housing supply. This acts to restrain price growth.

Regulations also limit Chinese investors to buying new properties. Exceptions are few. For example, a Chinese student may purchase an established property to live in while studying in Australia. But it must be sold once they return home…

Other benefits of Chinese investment include the very real jobs created in Australia’s construction industry and associated sectors such as housing appliances…

Knee-jerk arguments blaming Chinese investors for high Aussie house prices may be refuted with hard evidence. Unfortunately zombie ideas in economics have a habit of rising again.

Again, Laurenceson is either naive or being loose with the truth.

Like most people, I could not care less about non-residents developing and/or buying up newly constructed dwellings. These dwellings at least add to supply, as well as provide an important growth stimulus to the Australian economy. In a sense, apartment development and sales to foreigners have become a new form of export industry for Australia, and is arguably one of the few economic drivers in Melbourne and to a lesser extent Sydney at present. Without this development, these economies would be much weaker, with flow-on effects for jobs and incomes.

By increasing supply, foreign investment in newly constructed dwellings also places downward pressure on rents, which is good news for renters seeking to reside in inner city areas.

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However, concerns about foreign investment are primarily centered around the purchasing of pre-existing dwellings, which neither adds to supply nor provides a construction boost to the economy. Moreover, given widespread claims that a significant percentage of foreigners leave their homes empty, rather than renting them out, such purchases could also be reducing housing supply.

This is why there are rules in place that: 1) preclude non-residents from purchasing pre-existing dwellings; and 2) require temporary residents from selling their Australian home within three months of departing Australia.

The problem is, these rules are neither being monitored nor enforced by FIRB, and there has not been a single prosecution by FIRB since 2006.

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As noted by Kelly O’Dwyer:

What we’ve found out though, through the evidence that our committee has received, is that these rules have simply not been enforced through prosecution since 2006 by the Foreign Investment Review Board. I think there has been a failure of leadership of the Foreign Investment Review Board on this. I think they have dropped the ball. I think that if we have rules in place, those rules need to be properly enforced…

The other problem… is that there aren’t particularly strong disincentives under our penalty regime if somebody was to make either one purchase or multiple purchases. Under the existing rules, if FIRB did in fact prosecute somebody who had purchased one or more properties and they were not able to purchase those properties ’cause they were a non-resident foreign investor, it would take some time to go through the court process. And then, if that property had gone up in value, that individual would be able to keep the windfall gain that they had made through the increase in value of that property. Now that’s simply ridiculous and clearly needs to change…

I think our compliance and auditing regime is not as strong as it needs to be…

So simply claiming that foreign investment is good because it increases supply, and that non-residents are precluded from buying pre-existing dwellings, is correct in theory but wrong in practice.

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The crux of the whole foreign investment issue is that non-resident purchases of pre-existing dwellings are effectively unregulated. Fix the regime governing pre-existing housing – by ensuring accurate data collection and enforcement – and the perceived problem of foreign investment in Australian property will be solved. It’s that simple.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.