Chinese abandon Australian property

The Foreign Investment Review Board (FIRB) has released its 2018-19 Annual Report, which shows a big decline in foreign residential real estate investment across established and new dwellings:

As shown above, the number of foreign investment approvals for existing dwellings has collapsed from a peak of 5,876 in 2015-16 to 1,312 in 2018-19, whereas the value of new dwellings approved has collapsed from $7.3 billion to $1.7 billion over the same period.

In a similar vein, the number of foreign investment approvals for new dwellings has collapsed from a peak of 26,253 in 2015-16 to 3,986 in 2018-19, whereas the value of new dwellings approved has collapsed from $57.6 billion to $4.8 billion over the same period.

As shown in the next table, Victoria (read Melbourne) remains the foreign investment hot spot for residential real estate:

FIRB does not provide a break-down of residential real estate investment by country. However, its commentary suggests that the decline has been driven by China:

In 2018-19, the number of approvals and the value of proposed investment from China declined, shifting China to the fifth largest source country by value. The value of approvals fell from $23.7 billion in 2017-18 to $13.1 billion in 2018-19. The number of approvals fell by 1,915 (from 6,816 to 4,901). The value of approvals from China fell across all sectors. This has continued a downward trend in the number and value of proposed investment by Chinese investors since 2015-16. This could be due to a range of factors including China’s domestic policy settings which have increased scrutiny over outbound FDI and stricter capital controls. The effect of these policy settings at a broader level is also reflected in OECD data, which show a 30 per cent year-on-year decline in outbound Chinese FDI over 2017-18.

FIRB also outlines the following residential real estate compliance activities:

During 2018-19, 1,220 cases were identified for investigation (down from 1,710 cases in 2017-18). Of these, 1,068 investigations were completed (1,404 in 2017-18), which identified 600 properties that were in breach of Australia’s foreign investment rules (identical to last year) (see Table 4.1).

Compliance investigations in 2018-19 involved a broad range of residential property and identified varying severity of breaches. Identified breaches include:

• failure to seek approval before the purchase of a property;

• failure to sell an established property once the owner’s temporary resident visa expires;

• temporary resident visa holders owning more than one established property;

• Australian companies and trusts controlled by foreign persons owning established properties;

• failure to comply with the conditions of an approval, such as not adhering to the requirement to use a property as a principal place of residence, renting out a dwelling or failing to commence construction or to redevelop a property within specified timeframes;

• failure to undertake certain actions within a specified period; and

• the lodgement of a vacancy fee return with incorrect or false information.

Outcomes of investigations that identified breaches included divestments, retrospective approvals, variations of conditions and raising a vacancy fee liability. These outcomes are reported in Table 4.4…

Infringement notices

There are two levels of infringement notices which impose different financial penalties on a foreign person. A Tier 1 infringement notice may be issued where a foreign person notifies of a breach before an infringement notice is issued, while in cases where the ATO identifies a breach as a result of compliance activity, a Tier 2 infringement notice may be issued.

As you can see, there were only 83 divestments (forced or voluntary sales) in the 2018-19 year, whereby the seller is allowed to keep any capital gain.

Moreover, the average fine issued was a mere $6,903 – basically a slap on the wrist and more like a cost of doing business than a meaningful deterrent.

The ATO’s lack of enforcement comes despite the legislation explicitly stating that a foreign national found having purchased an established dwelling without prior Foreign Investment Review Board (FIRB) approval, or having failed to dispose of a property once they have left Australia (in the case of temporary residents), faces the following penalties:

  • Criminal penalty of $135,000 or 3 years imprisonment; or
  • Civil penalty of the capital gain made on divestment of the property or 25% of the purchase price or market value of the property (whichever is greater).

Third parties that knowingly assist foreigners to illegally purchase Australian homes are also supposed to face penalties of $45,000 individually or $225,000 for a company, under the legislation.

It is quite frankly astonishing that the ATO can vigorously pursue small businesses and individuals for minor avoidance or errors in tax returns, but turn a blind eye to illegal foreign buyers scooping-up Australian homes, in the process reducing opportunities for younger Australians.

Of course, this comes on top of the Coalition Government also shelving the promised implementation of anti-money laundering rules for real estate gate-keepers, despite warnings from the global regulator, the Paris-based Financial Action Taskforce, that Australian homes are a haven for laundered funds, and similar warnings from AUSTRAC.

Clearly, the Australian Government has little interest in actually policing illegal foreign buyers of real estate, and is tacitly complicit with dirty money infesting Australian real estate.

The only upside is that Chinese capital controls appear to have done the job for us.

Leith van Onselen
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Comments

  1. Andy McPherson

    Don’t believe the stats. States started charging foreign buyers more transfer duty. Foreign buyers soon learned that this foreigner tax could be bypassed by registering a local company or trust, and buying through that.

    Try looking at the statistics for newly registered companies or trusts purchasing property.

    • Yes, you might get ABR data if you are an appropriately authorised person but nothing that would link to activity I don’t think. ASIC registry data – same issue?

      Only the ATO would know I suspect. That kind of opacity benefits too many of our incumbent elites.

      A prime example of how any corruption creates deep systemic risk, it is never benign.

      • Well, if it’s only the ATO that knows, there’s no way that FIRB will savvy up to it!

        • In the past, publicly accessible state property title searches have helped ‘out’ the activities of corrupt Aussie politicians and the like, think Queensland’s moonlight state. If these have not been privatised by now, maybe this can be inferred from the change in the makeup of registering entities in a bulk data analysis? It would give you something, surely?

          • Apols for talking to myself but, yes. Cross match ABR and/or ASIC and titles data. If you could get enough data you’d probably see some telling patterns pretty quickly. Company or Director names might help. At least the common registered offices of entites being used would quickly show you the accountants/advisors who were neck deep in the practice to start some enquiries. There would be a lot of noise. It’s hard. Like I said the legislators in charge are generally mates with those who have a vested interest in this sort of thing being opaque (in my opinion – game of mates) but someone in the field or ATO might have a better idea.

    • Yes, but that figure includes commercial real estate, which the US dominates.

      I’m only interested in residential real estate. There was no breakdown of residential real estate, as explicitly reported in the article. China has traditionally dominated purchases of residential real estate.

      Case in point: the US had 401 approvals for a total of $58.2b in foreign investment ($19.6b in real estate). China had 4,901 approvals for $13.1b of total foreign investment ($6.1b in real estate).

      Obviously the much higher number of approvals from China relates to its preponderance towards low value residential real estate.

      • Economics 101

        Maybe, still highly speculative. I have seen a lot of “chatter” regarding Northern US / Canadian uptake of Australian and Kiwi real estate in the last 6-12 months.

        I think we all deserve a proper break down and it would be worth advocating on this parameter along with the money laundering.

        This is interesting.

        “Figures show the residential real estate sector saw a modest rise in the number of approved purchases last financial year to $14.8 billion, up from $12.5 billion, but remains a fraction of the $72.4 billion worth of residential investment that was approved at the peak of the foreign buyer boom in 2016.”

        Clearly a massive decline – and they have the data.

        • Economics 101, I think you should do a little more homework and find out where the funds form Chinese investors are coming from vs funds from US investors. Spoiler: you might be a little surprised if you actually find the answer.

          • Economics 101

            Do plenty of research Les. At least I do research rather than just rely on what ever scaremongering I’m fed by industrialists and their media / political lackeys. Maybe a little bit of self reflection there champ.

      • Wow. The USA is going to take it up the chute on commercial RE. I wonder who has the most exposure.

        • Economics 101

          Depends what you mean by commercial real estate. Say mining for coal in Sydney’s water supply which the NSW government just approved during the suspension of parliament in one of the most subversive acts to democracy this country has ever seen which makes Adani and Chinese investment in resources pale into insignificance – then they should do alright.

          If by commercial we mean buying up vacated on second hand party dress clothing stores on Brunswick St Fitzroy which have been empty for 4 years – then yeah, not so well.

          I think the former though – don’t you ?

          I wonder if we will see any rage about a foreign government working in cahoots with our state government to sell up our national resources and place our drinking water in jeopardy – you know – the whole sovereignty, democracy thing this website goes on and on and on about ?

          I’ll wait here with this skeleton.

      • Isn’t the FIRB threshold for reporting too high to capture most individual RE transactions of this type? However, I’m out of date on this topic. The abs has aggregate data on stock and flows of FDI but nothing small enough from memory. Anyway, a lot of Chinese money comes in from Singapore, Hong Kong (again from memory) by now it could be coming in from anywhere including the US. I’m pretty confident if you are relying on FIRB you are getting diddly squat of the real picture. Best ask Harry or Gotti but the latter person makes a good living from the fact that no one can figure it out from data.

  2. “The Foreign Investment Review Board (FIRB) has released its 2018-19 Annual Report, which shows a big decline in…” [REPORTED] “…foreign residential real estate investment across established and new dwellings:…

  3. The real money coming into the country was much smaller … most of these were purchased with 20% foreign money plus local mortgages paid from local rents

    • Exactly.
      Any foreign purchases of Australian assets undermine the competitiveness of our manufactured products via the mechanism of Paul Keating’s floated dollar.

  4. isn’t it in the ATO’s interest to turn a blind eye to FIRB? Higher ponzi, high intake of capital gains tax?

  5. People in the prestige real estate market game in Melbourne have told me that it’s been years since they’ve been beaten by a mainland bidder.

  6. small businesses and individuals for minor avoidance or errors in tax returns = they lose money
    illegal foreign buyers scooping-up Australian homes = they make money

    not that astonishing

  7. Unless the Aussie Dollar rebounds to 80c the Aus Property will remain in tight grip of Phoren Money sply the Dirty Chinese variety