Foreign buyers juiced the bubble, but won’t save it

Cross-posted from Rational Radical:

You’d have to be have been living under a rock to have missed the widespread consternation about the role of foreign investment (read foreign ownership – a crucial distinction) in Australian domestic real estate over the last few years. In particular, there has recently been much hand wringing about the impact of so-called capital controls in China restricting the flow of cash into our prized assets. I know, I know, say it ain’t so right? Where would we be without our precious housing market and all those foreigners lusting after our award winning weatherboard housing stock, golden beaches and trendy filament-bulb-lit cafes? I ask you.

I needn’t repeat the observation that Australia is experiencing the largest housing bubble in its history, I’ve banged on about that endlessly already. The latest Demographia report showing that Australia has the most expensive housing in the world (save Hong Kong) relative to incomes, combined with the highest household debt levels in the world, and our severely hollowed-out, post-industrial, commodity-dependent, extractive/speculative economy, should give us all pause for thought. But it won’t, because ‘Straya, equity maaaaaate’… Today is the national day of exceptionalism after all, so quit your whingeing and f-ing celebrate, alright?!

I digress. At the risk of being labelled a racist, I wanted to comment on a key source of internal moral conflict amongst us well meaning lefties and progressive sorts. Namely – selling all of our stuff to foreigners. Cashing in on our housing horniness is a national pastime these days, and being morally selective about who should and shouldn’t be allowed to buy everything that’s not nailed down in order to keep pumping up our Ponzi economy, is just a natural aspect of our cultural psychosis over asset prices.

It’s a subject that seems to be characterised by the false dichotomy between ‘Foreign (Chinese…) investment in Aussie real estate caused the housing bubble’ and ‘Foreign investment in Aussie real estate has no effect whatsoever on housing affordability and should be celebrated as a normal part of our multicultural society and open economy’, with mainstream liberals generally unable to discern the grey area that actually reflects reality and a defensible moral position.

That’s largely because few bother to make the distinction between legal investment in new housing and unit developments that add to the productive economy, and the largely illegal variety of foreign ownership, involving the purchase of existing housing stock. The illegal type of housing ‘investment’ adds nothing to the productive economy, and worse, damages the economy due to its detrimental effect on housing affordability, and its adding to general inflationary pressures on interest rates and the exchange rate, an issue rarely discussed in detail in this polarised debate.

Worse still, transferring ownership of assets to offshore investors is simply handing over economic rents to private interests, allowing economic surplus to be captured as rising land prices, that are channeled offshore, impoverishing us all as value is removed from the economy and nothing produced in return. The failure to tax the rising value of land, and it’s resulting capture by private interests is at the very heart of the imbalances in our housing market, and indeed the illness plaguing the global economy and financial system.

That’s a subject that I’ve written about previously, and will come back to in more detail another time. Suffice to say that auctioning off our land without any requirement for productive investment is textbook bad economics, something that we excel at in Australia. For now, my focus is on the presstitute media that wear this malinvestment as a badge of honour and take pride in the hollowing out of our economy in service to the dark gods of real estate speculation.

A spruik too far…

To my knowledge, there is no greater bastion of economic non-analysis in the mainstream left-wing than our housing heroes over at Fairfax, who have been the self appointed spruikers-in-chief, indiscriminately backing the direct flow of offshore capital into Australian housing as some sign of our economic superiority, and dubious proof that there is no housing bubble – or that if there is, the ‘Chinese wall of money’ will save it from crashing.

But in recent weeks, there have been cracks appearing in the official house-horny real-estate-porn Chinese-buyers-forever narrative peddled by Fairfax. With some amount of internal conflict, their publications finally seem to be admitting that they were delusional about Chinese investors continuing to pump Australian real estate demand indefinitely, thereby saving us from the pending market downturn.

You know that the real estate industry – and back-patting media outlets protecting their interests – are worried about the wall of money coming to an end, when they send out a random army of anecdotes and estate agents to variously claim that ‘Foreign investment in Aussie housing is all good, totally above board, has no detrimental effect on housing affordability, but is also pumping house prices and will continue to do so, because not even the Chinese government can compete with the awesomeness of Australian housing, and by the way there is no housing bubble, and also foreigners will save our housing bubble from collapse, wait, I mean ….. blah blah blah’. Talk about head-exploding editorial contradiction. There ain’t smoke without fire folks.

Anyone with a shred of understanding of global macro economic forces knows that the Chinese government cannot and is not allowing continued capital flight. Their efforts will never be comprehensive and completely effective, but they are very real and significant due to the need to respond to macro-economic forces beyond their control, such as the destabilisation of their currency and stock market, their own mega real estate bubble, and a rocky transition to a consumer and services driven economy, which is currently running a big risk of hard landing.

When combined with the recent and long overdue resourcing of data collection and enforcement efforts, and a widened penalty regime to properly enforce our foreign ownership laws, the foreign property bid will soon be toast.

So for those with doubts about the whole issue in general and what it really means for the housing bubble, who sense that the issue is not black and white, and who are struggling to say the word ‘foreign’ without choking on their progressive liberal credentials – based on the actual evidence, an understanding of economics and a rational moral perspective, one can summarise as follows:

• Foreign investment did not cause our housing bubble, we did that for ourselves using our atrocious mix of tax policy, record growth and level of cheap housing debt, and speculative greed.
• The foreign property bid is real, and with respect to the widespread purchase of established housing, has been shown to have had a substantial detrimental effect on housing affordability, worsening the existing housing bubble.
• Both Labor and LNP governments helped liberalise the legislation and governance protecting established residential housing, in no small part to help save the housing market from collapse in the last few minor corrections since the bubble kicked off around 1998.
• While governments have done their best to turn a blind eye, foreign buyers are excluded by law from purchasing established properties with a few exceptions, which is a very separate phenomenon from foreign investment in new residential developments.
• A senate inquiry, recent forced sales and investigations by the ATO and the FIRB (Foreign Investment Review Board), and lots of private analysis and data collection proves that there has been significant illegal purchasing of established housing in Australia.
• Combined with reports from global anti money laundering agencies, the majority of illegal activity can be characterised as very wealthy foreign nationals laundering money through Australian real estate.
• This fact has not stopped Fairfax and the real estate industry pursuing a relentless spruik-fest of puff pieces and wild claims to the effect that foreign demand for existing properties is a good thing for the market with an endless supply of capital to be expected.
• Illegal money laundering through residential real estate is wrong and damaging for many reasons, including but not limited to: legality, morality, housing affordability, economic damage, upward pressure on the currency and interest rates.
• This phenomena is not unique to Australia, but rather is common to most Western housing markets, where the flight of capital into ‘safe assets’ has been ongoing for some time, particularly since the GFC.
• It’s not racist to say that our existing non-discriminatory foreign ownership laws should be enforced properly, but it is racist and incorrect to say that Chinese people are the sole reason houses are unaffordable. The answer to that lies much closer to home.
• Fairfax should be investigated by the ATO for their implicit support of illegal money laundering through residential real estate.
• Whatever your view of the above facts may be, strict capital controls and corruption crackdowns in China, combined with strong resourcing of domestic law enforcement and a broader penalty regime have put a pin in this illegal activity.
• Domestic economic regulators such as the RBA need these crackdowns to be successful, because our government is unwilling to take on other reforms to fix our housing bubble, and they must take the pressure off house prices for interest rate policy and the exchange rate to be supportive of our rapidly flagging economy.
• Ipso facto, illegal foreign investment in established real estate is holding the economy back, causing damage to us all in order to enrich the few.
• This change of circumstances for foreign ownership will have a material and immediate effect on property prices, but will not pop the bubble; the bubble is already bursting of its own accord thanks to counter-cyclical tightening of credit conditions, the inevitable failure of Ponzi economics, the bubble’s own internal contradictions, terminal unaffordability, the highest household debt in the world, and the major structural adjustment bearing down on our tanking economy.

Bye bye illegal foreign property bid, and bye bye housing bubble. Good riddance to the both of you.