Liberal MP, Kelly O’Dwyer, appeared on ABC Lateline last night to discuss foreign investment in Australian real estate, as well as negative gearing (amongst other things). The full transcript can be viewed here,
On foreign investment, O’Dwyer once again slammed the Foreign Investment Review Board’s (FIRB) monitoring and enforcement of foreign ownership rules, in particular the requirement that non-residents cannot purchase pre-existing dwellings and the requirement that temporary residents sell their pre-existing homes within three months of departing Australia:
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. That is the only way we can give confidence to the Australian people that our foreign investment framework is working as it should. And so we would be looking to tighten up exactly what occurs in terms of the enforcement penalties that can be applied, but also making sure that FIRB is doing its job.
EMMA ALBERICI: You’ve previously criticised the Foreign Investment Review Board, as you’re saying now, for not being tough enough and not showing enough leadership. Foreign investors are not meant to be allowed to buy existing homes. Have you seen evidence to suggest they’re getting around that particular rule?
KELLY O’DWYER: Well 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. So it is quite a difficult and tricky area. The other problem here, Emma, too 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.
EMMA ALBERICI: So how are these foreign investors circumventing the rules?
KELLY O’DWYER: Well, 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 are looking at how that can be enhanced. That will go to the recommendations that we make as part of our committee’s review and report that will be handed down later in the year and this is a critical area to ensure that people have confidence.
EMMA ALBERICI: I saw reports after your initial comments that the Foreign Investment Review Board only has something in the order of eight people to police the whole country and the foreign investment in the area of housing. It does seem a big task for just eight people.
KELLY O’DWYER: Well, look, I would certainly accept that they probably do need some more resources, but I don’t accept that they were not able to undertake any prosecutions since 2006. There were prosecutions that took place with the previous coalition government over that time, divestments of properties for people who had purchased contrary to our foreign investment framework. I simply don’t accept that they – their whole job there was to do nothing and I don’t think that that is an excuse. I do think though that more resources are needed for the Foreign Investment Review Board. One of the issues that we have been looking at is that with the applications that go before the Foreign Investment Review Board, that perhaps there ought to be a modest fee that is associated with those applications and that that money could be hypothecated to FIRB for their compliance, auditing and enforcement activities.
EMMA ALBERICI: Because at the moment, as I understand it, if someone buys – a foreign investor buys an Australian residential property, they actually have to proactively go to the Foreign Investment Review Board for – to apply to undertake that investment. If they know they’re contravening the rules, it’s highly unlikely, isn’t it, that they’re actually going to put themselves forward?
KELLY O’DWYER: That is exactly right, which is why 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.
EMMA ALBERICI: How widespread is the abuse of the rules?
KELLY O’DWYER: Well it’s very difficult to put a finger on it and that’s why we have been receiving as much evidence as we can from various different sources, matching that evidence up and looking to make recommendations that strengthen our framework.
O’Dwyer is disappointing on the issue of negative gearing, claiming that the rules are working well and that reforming negative gearing so that rental losses cannot be claimed against wage and salary earnings would have a deleterious impact on the rental market:
EMMA ALBERICI: Well investor loans are of the biggest concern to the Reserve Bank board. What role is negative gearing playing in pushing up house prices?
KELLY O’DWYER: Well, look, we haven’t specifically focused on that particular question, but I know – I heard your earlier reports before about Saul Eslake calling for a change in the negative gearing rules. I don’t see there being any need to actually change those rules. There are lots of unintended consequences that flow from changing rules such as negative gearing. For instance, you can actually have a dramatic impact on the rental market and people being able to rent housing if you were to make such changes. But any potential tax changes ought to be properly considered in the tax white paper, which is coming up. We don’t have any plans to make changes to negative gearing. But any tax changes that need to be made need to be made holistically and that’s appropriate for the tax white paper.
EMMA ALBERICI: And would you welcome a focus on negative gearing and its impacts, because Saul Eslake, who you just mentioned, who is the chief economist at the Bank of America, says that negative gearing doesn’t do much to improve housing supply because investors generally buy established housing and there’s no foundation to claims it improves the supply of rental housing?
KELLY O’DWYER: Well, you’re quoting one economist. Emma, you could equally find quite a number of other economists who would give you a very different perspective on that.
EMMA ALBERICI: What’s your perspective?
KELLY O’DWYER: Well my perspective is the current situation is working well and I see no reason to make changes to the negative gearing arrangements.
EMMA ALBERICI: But you’d welcome a focus in the tax white paper?
KELLY O’DWYER: Well I think when you’re considering any holistic review of tax, you look at all issues on the table, although we have no plans as a government to make any changes to negative gearing.
O’Dwyer’s arguments on negative are obviously not supported by evidence. As shown many times before, when the Hawke Government temporarily quarantined negative gearing between 1985 and 1987, such that an asset’s losses could only be claimed against the same asset’s income (rather than unrelated wage and salary income), there was no material impact on rents (see red line in next chart).
And why would there be a material impact on the rental market? The overwhelming majority of property investors – over 90% – invest in existing dwellings rather than new construction (see next chart), which means that they are merely turning homes for sale into homes for let, and turning would-be owner-occupiers into renters.
The only “unintended consequence” of reforming negative gearing is that house prices would likely fall. But so what? Australia’s housing is amongst the most expensive in the world and some price reduction would do wonders for affordability, inter-generational equity, not to mention more efficient resource allocation as less capital is pumped into a largely non-productive asset.
