Government to review foreign property purchases

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By Leith van Onselen

Reports have emerged over the weekend that the Government will launch an investigation into the impact of foreign purchases of residential property, and whether foreign buyers are being property regulated. From The Telegraph:

Chaired by Victorian MP Kelly O’Dwyer, the parliamentary inquiry will hold public hearings in real estate hot spots including Sydney and Melbourne.

“We need more homes, so foreign investment that increases the number of homes available is a good thing, particularly where it is housing for first-home buyers,’’ she said.

“That is the objective of current policy, but we need to examine what is happening on the ground.

“The great Australian dream to own your own home is hard enough to achieve on two incomes, with years of savings and a large mortgage.

“We need to make sure that we aren’t making it more difficult — which is why we are going to examine the facts in our inquiry.’’

…there are concerns the Foreign Investment Review Board lacks the manpower to police the rules, with the latest data suggesting investment in existing properties by foreign investors is growing. There are also concerns that rules requiring temporary residents to sell Australian properties when they leave are not being policed.

The terms of reference for the inquiry will ask the committee to investigate whether the current rules are adequate and if existing laws are being enforced.

This is a great move by the Government.

Data surrounding foreign investment in Australian real estate is woeful. The data that is publicly available is tardy and opaque. And when a journalist does try and gain more useful statistics on the extent of foreign property buying, they encounter huge roadblocks, with the data treated as if it was some kind of state secret (see here and here).

Enforcement of the foreign ownership rules seems equally inadequate. As the mythical Chodley Wontok found out when testing the efficacy of FIRB’s approval processes using bogus visa and passport information, the purported checks and balances in the system designed to prevent foreigners from purchasing pre-existing homes failed dismally, suggesting the rules are little more than window dressing.

An inquiry into foreign property buying will hopefully provide some transparency to the system and identify holes in monitoring and enforcement processes. It will also provide a platform to debate the efficacy of allowing foreign nationals to buy pre-existing dwellings, whose purchases have grown strongly over the past four years to $5.42 billion (5,091 properties) in 2012-13 (see below table) – placing an increased burden on younger Australians struggling to buy their own home.

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Already, the property industry seems to be gearing-up to oppose changes to foreign purchasing arrangements. According to The Australian today, Colliers International has released a report highlighting the “wealth effect” and increased consumption gained from foreign property investment:

“The impact of offshore investors on the residential market has a flow-on effect for the retail sector via increased demand and prices for housing. Increasing residential property values impact on how wealthy consumers feel and in turn their propensity to spend”.

In a similar vein, the head of the Property Council, Peter Verwer, claims that foreign investment in real estate is “crucial” to Australia’s growth and that the Parliamentary Inquiry would distract attention from “fundamental issues surrounding supply”.

While the lion’s share of the blame for Australia’s unaffordable housing rests on distorted tax policies (e.g. negative gearing) and the myriad of constraints on housing supply implemented by state and local governments, this does not mean that the system around foreign investment – particularly as it pertains to pre-existing dwellings (putting upward pressure on demand and prices) – should not also be examined.

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Comments

  1. notsofastMEMBER

    Lets be realistic. The unwritten purpose of this review is not to work out how Australia can limit foreign ownership of land, houses and other assets in the interests of the average Australian but instead how Australia can massively increase that foreign ownership. In other words, let the rent seekers make as much money as they can before the SHTF.

      • saintmatthewMEMBER

        and for the first time in their lives Australia’s largest and most politically powerful demographic, the baby boomers, have serious competition for the best houses – a situation they wont accept.

      • Political pressure may be rising, but foreign ownership of Australian assets is an inevitable result of our CAD.

        I’m expecting that foreign ownership will only increase, wi hsydney and Melbourne turning into some kind of Chinese oligarch playground (like London is to Russian/Arab elite). Then, any locals that complain too much will be silenced with accusations of racism, anti free market etc.

      • If they are calling calls to curb foreign investment racist now, then they haven’t seen anything yet…

        People will take the law into their own hands if they see their future being sold out from under them. If you recall the backlash that happened with the bashing of several indian students a while back……the desperate will put 2 and 2 together and make Australia look like an extremely hostile place to come. I for one cannot blame them when you look at the pack of self serving b**tards we have in positions of power.

        I am not condoning violence, merely pointing out that it is inevitable if things continue on this path…..

      • “People will take the law into their own hands if they see their future being sold out from under them.”

        Unlikely.

        Footy. Cricket. The Block. My Kitchen Rules. New iPhone. Federal Election. Etcetera.

        Unlimited distractions.

      • @ saintmatthew

        The Baby Boomers own about 46% of investor residential property, and it was bought mainly because there was no universal superannuation until 1992.

        I think you’ll find that the BB’s are not dumb enough to buy property at its zenith…they are the ones selling for prices they had never, ever dreamed of…

        Thank you very much Reserve Bank of Australia for providing this once in a lifetime opportunity.

        You may have noticed that Glenn Stevens is in that demographic.

      • “People will take the law into their own hands if they see their future being sold out from under them.”

        I don’t know about taking the law into their own hands, but resentment will certainly grow as more and more people find themselves locked out of the housing market. The Chinese are obvious by their looks, and while it’s unfortunate for the Chinese who have been living here for many years, resentment towards them will be an inevitable consequence if something is not done to curb foreign investment.

        Of course, it’s the government and vested interests to blame – the Chinese (and other foreign investors) are only doing what they are allowed (or can get away with). Anyone with bucketfuls of money they want to get out of the government’s hands would do the same if there was some other stable country rolling out the red carpet for them.

    • Nobody owns the land when they make a property transaction (foreigners or otherwise). You merely hold a title (i.e., title holder) to a LOT (location of title) in a DP (deposited plan).

      You don’t own land, you hold a piece of paper.

      Depending one’s legal viewpoint, the land is either owned by the Crown or by the original sovereign tribes (with a strong argument for the latter).

    • I agree. Elections are won on smoke and mirrors and bread and circuses.

      This was initiated by the “people’s” party, it is Labor policy.

      The Libs and their voters want Sydney to be London, or worse.

    • Strange Economics

      A clever rent seeker doesn’t need to relax the formal rules. Just lobby enough to leave the loopholes only and don’t enforce things and no policing. (the lessons from the cigarette industry with smoking in outdoor areas of pubs and everywhere). Doesn’t upset the masses and no headlines. e.g. No enforcement of foreign property sales. Loopholes for 457 workers for banks and miners!

  2. I for one hope that the review will have more than just the premise that foreigners are causing problems. I don’t know how anyone could seriously believe Australians didn’t screw up affordability on their own – a few foreigners turning up at the end of the party is a convenient political escape.

    • Sure, they are not the primary cause of Australia’s housing woes, but foreign purchasers are definitely a factor, so should be examined.

      That said, it would be nice for once if the Government conducted a sweeping review of negative gearing, supply-side constraints, or other higher order issues.

      • Agree with all, but politically will it be played like that? Or a smoke screen so the pollies can go on ACA and blame the foreigners for high house prices? I find it concerning when a review into only one aspect of affordability – which is also the easiest to attack politically is announced. If affordability is a serious concern all aspects you mention would be considered.

    • If nothing else, I hope they understand the FIRB is a joke and its reporting and regulatory oversight is significantly beefed up as a result of this review.

    • Whilst white Australians are the biggest property thieves. I think it’s foreigners that are the main thing driving sentiment at the moment.

      • Yes true. Foreigners preventing up to ~5000 Owner Occupiers buying a home is worth an investigation.

    • +1 Pat.

      I think sadly this is an attempt to find a bad guy (hopefully because they also believe a crash is around the corner).

      If we had a land tax it would solve this problem, as who wants to own a property in a foreign land if you have to pay tax on it? I’d rather see us charging properly for the use of land as a nation than worrying about the nationality of those who claim to have the right to ‘own’ it.

      • We have a state based land tax on property not used as principal place of residence subject to a threshhold of exemption. Three home units in Sydney middle rings is probably enough to incur land tax. After land tax applies, the net return on an additional home unit is negligible at current prices. When inflation was high, prices were much lower and net nominal yields were much higher than today, the land tax was not such a huge impact on net return before land tax. At high land prices and low nominal returns it really bites.

    • saintmatthewMEMBER

      Granted the situation was caused prior to the foreigners turning up now – however to now add another ingredient to the toxic brew bubbling away would quite literally blow the whole thing up

  3. An inquiry is sorely needed, those in the know and profiteering in it have no interest in information being made more transparent.

    It is pointless saying foreign investment builds more homes (well apartments) when the sole purpose for the builds is just to sell to foreigners. Private investment into established properties by foreign investors should be suspended immediately.

    • They should certainly scrap the rule of buy established to rebuild which gives foreign investors access to established homes. I’d be certain that rule is being abused willfully.

      • On the basis that knock down/rebuild results in no additional homes, and in fact just creates a more expensive one, I wholeheartedly agree.

    • “An inquiry is sorely needed…”

      It’s not the inquiry that’s sorely needed – it’s action that’s sorely needed. We don’t want the inquiry to BE the only action that is taken e.g. “We’ve already done something – we’ve had an inquiry.”

      The question is – what action, if any, will the government take, with full knowledge that it will have some effect in dampening prices? And this is my fear – that they won’t do ANYTHING to lower prices.

      So therefore, and I hate to say it; the only answer, perish the thought – is to introduce a great big FHOG to compete with the foreigners and SMSFs!

  4. Flaws?
    1. It will take 3 years to get data;
    2. It will not identify the underground network of locals as proxy buyers (using SMSFs, trading companies, individual portfolios) on behalf of undeclared foreign buyers;
    3. Likely to be treated in same manner as 2004 Productivity Commission ‘First Home Ownership’ & 2008 Senate ‘A good house is hard to find’ inquiries, – but I suppose we can hope.
    Recommendations?
    1. 10% National Infrastructure Levy on all purchases by foreign buyers;
    2. Zero buyer grants and reduced rate of tax deductions via ATO;
    3. Additional Council tax levied for unoccupied property;
    4. Temp visa holders pay CGT on calculated increase of value of home when they become Permanent visa status;
    5. No CGT exemption for Temp visa holders who leave the country (they helped add to inflation);

  5. Sales to foreigners wouldn’t be such an issue if the supply was significantly higher.

    It all comes back to the limitations on supply, although negative gearing/low capital gains tax also contributes.

    • +1

      I saw a story in the Tele on the weekend about this issue. It quoted a real estate agent as saying that the Chinese buyers he was dealing with were only purchasing homes at $4 million +, which is not competing against first home buyers – the subtext being that they should be able to exploit this opportunity unhindered.

      Its amazing how real estate agents are often quick to use the lack of supply as a reason for prospective buyers to get in quick, but also willing to disregard basic supply and demand when it is not in their pecuniary interests.

  6. FIRB regulatory failure and lack of transparency is the issue here.

    Starting point has to be an independent audit of the most recent 1000 sales of existing dwellings in Sydney and Melbourne for FIRB compliance. Publish the audit results within one month. Any non-complying sales immediately voided.

    FIRB chair Brian Wilson must be called before the inquiry to explain exactly what the FIRB is doing to “monitor and ensure compliance with” the FATA on the sale of existing dwellings.

    Minimum recomendations

    1. Purchases by foreigners allowed for new-builds only. No exceptions.

    2. Copy of AUS passport required for transfer of title for all existing dwellings. No exceptions.

    • flyingfoxMEMBER

      2. Copy of AUS passport required for transfer of title for all existing dwellings. No exceptions.

      Plus history of funds going back at least 18 months.

      • That funds history is crucial to ensure that people locals aren’t buying it for rich family overseas.

        But let’s be honest, they will do nothing. It is just going to be a few soothing words at best after a long inquiry that finds nothing. I think most purchases are through established immigrants, not foreigners.

        I gave up a long time ago. This is probably even bad news as it just allows the government to buy time while it keeps pumping it’s members’ portfolios. Remember, the solutions to housing affordability are obvious and well documented as well as tested ad proven elsewhere. They don’t need more investigations, especially since there has already been 2. Any investigations are simply proof to me that they don’t want to fix anything.

      • I would like to see a number of compliance officers (20?) employed to seek out any properties that fail the foreign ownership rules and have such properties confiscated by the state since they were purchased illegally. Law will state that no compensation will be awarded to the illegal owner since it is an illegal purchase, the compliance officer will earn a nice commission, and the house can hopefully go to an Australian OO. Win-win-win.

      • agree with Partrician. Flying fox, whilst I agrre with the intent of your proposal any policies implemented have to be easy to implement otherwise they will get abused and become a scapegoat for some to claim we should not be restricting foreign investment. A passpost number requirement is the easiest to implement. Simply provide it and wash it against a database of complying passports (which will be citizens, perm residents and maybe students depending on the rules).
        Validating funds etc would be a minefield. What is a valid source and how much?? if i am an aus citizen and inherit from my granma in NZ can that be used??

      • flyingfoxMEMBER

        @squirell

        Validating funds can be easily done on a first pass basis. Just look at accounts etc. Most other transaction like inheritance have some sort of paperwork that can be easily validated.

        Some of those checks are already meant to be taking place as part of proceeds of crime/terrorism checks.

        It is not that difficult, it happens everyday and will only be necessary if you have a very large deposit or pay cash.

      • flying fox – so what happens if you secure with a loan from overseas (perhaps most foreign purchases are)? how will these be monitored? and whats to prevent someone paying with a 10% deposit, and then 5 years later paying it off with the funds they parked overseas to avoid the monitoring, potentially drip feeding it. Existing laws for money laundering dont necessarily work that well either, but even if they do they are aimed at a smaller criminal element and often are an additional tool to supplement existing surveillance of criminal activity – under your proposal it will be aimed at a far wider network of property buyers, both local and foreign who are not participating in anything inherently criminal …. it just wouldnt work and would get used as ammunition by the politico housing complex.

      • ‘Some of those checks are already meant to be taking place as part of proceeds of crime/terrorism checks.’

        It makes you wonder when a case involving $650K and a Cambodian student living in Townsville makes the MSM, just how much is being missed. Otherwise those stories are a red herring, done as a diversion from the main game where dirty money in the tens of millions per family in some cases just walks onto our shores without a question being asked.

        http://www.couriermail.com.au/news/queensland/university-student-has-650000-frozen-by-federal-police/story-fnihsrf2-1226809034811

      • flyingfoxMEMBER

        @squirell

        The objective is to stop foreign buyers buying current stock. Not new builds. Therefore, if they buy new builds, go for it.

        so what happens if you secure with a loan from overseas (perhaps most foreign purchases are)? how will these be monitored?

        If it is a new build, not need to check. If it is an existing property, they aren’t allowed to purchase regardless. If they are using a local proxy, the proxy needs to show the trail of money.

        and whats to prevent someone paying with a 10% deposit, and then 5 years later paying it off with the funds they parked overseas to avoid the monitoring, potentially drip feeding it.

        Banks have to report all transactions over 5K. Ever bought PM? They take your ID and send it to the relevant authorities. If I as an Australian citizen has my ID checked every time I have transaction over 5 or 10K, its not much of a hassle to have these in play for loan repayments etc.


        Existing laws for money laundering dont necessarily work that well either, but even if they do they are aimed at a smaller criminal element and often are an additional tool to supplement existing surveillance of criminal activity – under your proposal it will be aimed at a far wider network of property buyers, both local and foreign who are not participating in anything inherently criminal …. it just wouldnt work and would get used as ammunition by the politico housing complex.

        My suggestion was that the technology for this already exists. It happens every day. If someone wanted to, they could tell you each and every foreign purchase of existing property including the money trail. The only difference is, that I propose that it be enforced.

        Why won’t it work? For the majority of people on with 80% LVR, it changes nothing. They would not even need to show anything.

      • flyingfoxMEMBER

        @jimbo

        Currently there is nothing stopping you from bringing large sums of money into the country unless they are shown to be a proceed of crime.

        Most “dirty” money is not a proceed of crime, corruption aside.

      • flying fox – how do you know someone is a proxy?? you dont, which means ALL purchasers must show the money trail. Thats a mountain of admin work to get through.

      • flyingfoxMEMBER

        flying fox – how do you know someone is a proxy?? you dont, which means ALL purchasers must show the money trail. Thats a mountain of admin work to get through.

        You don’t. But my suggestion is to only look at the trail of abnormal purchases. People with very high deposits or cash buys or anyone buying multiple properties etc within short time frame without a history.

        It is not that hard and does not require a mountain of paper work. We do it for everyday mundane transactions etc.

        Considering the amount of paper work it takes to purchase a property etc, it is a minor imposition.

        Simple thing to do is for your bank to clear (history of deposit etc) the finance (which they already do) when you purchase. You send the clearance in with your paperwork. This is if you want to test everyone.

    • i do think we also need to consider whether purchase of “new builds” really does add to supply. I remember reading somewhere that the Rudd tripple whammy FHOG for new builds during the GFC merely soaked up existing latent supply. Also, if foreigners are willing to pay a premium price over locals to get their money out of China, this sets a floor price under new homes which trickles out to all existing properties.

    • Copy of AUS passport required for transfer of title for all existing dwellings. No exceptions.

      Free passport issued to all Australia citizens. No exceptions.

    • Good thoughts Pat. I wonder what Brian Wilson would actually do on a daily basis? There are only so many China trips you could take spruiking Aussie real estate.

  7. flyingfoxMEMBER

    I wonder if the weekend protests mean that something might actually come out of this.

  8. this is welcome news – in terms of monitoring, isnt the easiest thing to simply require someone to provide a passport number to REA when buying existing property? The passport number would be sent to the FIRB who matches it against databases held by immigration which must show the passport holder is either citizen, resident or student. Fines for those who are not.

    HOWEVER – I am guessing its probably the case that foreign investors are not the big problem. Its FOREIGN money buying existing houses which may simply be a result of a) recent immigrants (immigration is way too high) b) students/existing residents buying on behalf of family/friends back home or c) foreigners getting past restrictions on existing property by knocking down and rebuild

    • Fines are inadequate. Confiscation without compensation is appropriate.

      Edit: And yes good suggestion for initial easy-win monitoring

  9. Kelly O’Dwyer on topic on RN this morning

    http://www.abc.net.au/radionational/programs/breakfast/kelly-odwyer/5324754

    KO’D seems to have a reasonable grasp of the housing supply imperative and FIRB regulatory failure.

    Journo asked one decent question on enforcement of required sales of dwellings by departing TVH’s. It would be interesting to see the data on this.

    MSM journos really stuggle to separate the race issue from the regulatory failure of the FIRB. Thankfully O’Dwyer seemed determined to confine her role to the later.

    • TP,

      Thanks for link.

      Those were good suggestions above.

      I think the government will take the issue seriously as it has real potential to gain traction in talk back land.

      Some simple regulation changes are all that are required.

      1. As you suggest, Foreign buyers and temporary residents restricted to new property only. This avoids the impossibility of policing temp residents selling existing property on departure.

      2. Australian TBTF banks are not permitted to lend to foreign buyers or temp residents for purchase.

      3. All new properties sold to foreign buyers or temp residents to be permanently subject to a land tax on the unimproved value and exempt from stamp duty. This would be a good idea for new property generally.

      4. States governments to reduce restrictions on land usage to ensure flexible supply response to increased demand from foreign buyers.

  10. Kelly O’Dwyer on topic on RN this morning

    http://www.abc.net.au/radionational/programs/breakfast/kelly-odwyer/5324754

    Seems to have a reasonable grasp of the housing supply issue and FIRB regulatory failure.

    Journo asked one decent question on enforcement of required sales of dwellings by departing TVH’s.

    MSM journos really stuggle to separate the race issue from the regulatory failure of the FIRB and improving new housing supply. Thankfully O’Dwyer seemed determined to confine her role to the later.

  11. Hopefully the full Chodley Wantok episode will be included in a number of submissions.

    Unfortunately no-one is game to take a writ of mandamus to get FIRB to enforce their rules.

  12. Eventually, far too late and after untold damage has been done, our lords and masters will wake up to the fact that if you lie down with dogs (by which I mean kleptocrats intent on pumping a thoroughly corrupted body politic for cash for as long as they possibly can and spiriting that cash offshore to a compliant, clapped-out busted flush like Oz) you wake up with fleas. At that point, the meeja and our entire ruling claque will blame “the Chinese” and the true villains from the point of view of Australian society (ie. those who have retired on their slice of the ill-gotten gains of the mainland Chinese gangster/ruling class) will walk away smelling like roses.

    The ability to see beyond the ACA/Domain/Block/MKR/Hardly Normal-level spin on this kind of thing is just not there in society at large.

    Living in HKG, there are no such illusions. The locals conduct anti-mainlander rallies on the high street here. Just imagine how brave you’d have to be to openly do that in HKG, given the possibility for PRC-style justice at some point in the future. They know that their country (or their division of the PRC) is being systematically wrecked. At least they don’t have to worry about being called racists.

    • “At least they don’t have to worry about being called racists.”

      …the irony is that the average bogan aussie will not protest against their political leaders. The way they’ll vent their frustrations will be ignorant racism towards the local Asian Australians (i.e. fellow Australian Citizens who are in the same boat as they are).

      while valid and educated criticisms against foreign property purchases done by non-bogan Australians will be labelled as “racist” in the msm…

      smdh

      • Spot on bk.

        Which is why this particular Yes Minister-style “inquiry” is a perfect distractionary unicorn.

        Even MB is cheering its appearance.

      • The problem is if you walk down the streets chanting “we want macroprudential rules, higher interest rates, the removal of First Home Vendor Grants, and all the other government intervention”, it doesn’t have the same ring to it.

        The left is no less guilty. “Abbott bad, there is nothing good about the Libs what so ever, Labor/Green the best”. They wreak of communism which has been no less guilty of mass murder and severe oppression.

        If you kick people while they’re down, they’re inclined to not be terribly civilised towards the uncivilised behaviour that brought them down in the first place.

        That said. If there is no crash I think people will just move to the likes of Newcastle or put up with mega mortgages, or just spurn debt slavery ie “adulthood”.

        A lot of those southern cross tatt bogans have mega mortgages themselves now and know where their bread is buttered, ie knocking down houses to stick up unit blocks.

        The population is just too politically disparate to conjure up any real momentum against our banker/property mafia overlords.

        I mean no doubt those March in March types want all but open borders, yeah, that’d be great for housing affordability. Not.