Who crashed the economy?

Transparency surrounding real estate investment by foreigners has returned with the Foreign Investment Review Board Annual Report 2010-11 showing 9771 real estate investments worth $41.5 billion was approved in 2010-11.

In December 2008, the Rudd Government announced a change to legislation, it claimed, was designed to ‘streamline’ some of the administrative requirements for the Foreign Investment Review Board (FIRB). As part of these changes, temporary residents could purchase Real Estate in Australia without having to report or gain approval from the FIRB and would allow the FIRB to concentrate on larger issues in the ‘National Interest’.

As you can see from Chart 2.1 extracted from the Foreign Investment Review Board Annual Report 2010-11, Real Estate transactions do make up the majority of the applications considered by the FIRB, but many questioned the timing of the announcement. It was at the height of the GFC, and two months after the announcement of the First Home Owners’ Boost, designed to help prop up Australia’s Real Estate sector. House prices had fallen 4.7 percent. Opening up the floodgates to foreign temporary residents could be seen as a further measure to help provide extra demand and keep the housing market afloat.

By March 2010, the media was flooded with articles on Australian’s being outbid by an army of Chinese residents, effectively pricing Australian’s out of their own housing market. But the ‘streamlining of administrative requirements’ actually meant no records were kept, or more specifically it would seem that these foreign temporary residents no longer needed to lodge applications with the FIRB. There was public outcry and no real data to support just how big or small this issue actually was.

The outcry had grown so intense, that on the 24th April 2010 the government buckled and a tightening of foreign investment rules relating to residential property was announced, complete with a package of new civil penalties, compliance, monitoring and enforcement measures. The government even went to lengths to set up a 1800 hot-line for residents to report suspicious property buyers and help calm a heated public.

The press release by the former Assistant Treasurer, Senator the Hon Nick Sherry said “The Rudd Government is acting to make sure that investment in Australian real estate by temporary residents and foreign non-residents, is within the law, meets community expectations and doesn’t place pressure on housing availability for Australians.”

According to the FIRB Annual Report 2010-11, “As of 24 April 2010, temporary residents residing in Australia are no longer exempted from notification of proposed acquisitions of established residential real estate for their own residence, established residential real estate for the purposes of redevelopment, new residential real estate and vacant residential land. Temporary residents were previously exempt from April 2009 under the changes announced in December 2008. ”

The Financial Year 2010/11 is the first full year temporary residents must apply to the FIRB and where records have been kept. It may never be known just how many temporary residents purchased Australian Real Estate in the years 2008/09 and 2009/10.

» Foreign Investment Review Board Annual Report 2010-11 – Foreign Investment Review Board, 20th April 2012.
» Government Tightens Foreign Investment Rules for Residential Housing – Assistant Treasurer Nick Sherry, 24th April 2010.
» Australian Federal Government gets tough on foreign ownership rules – News Limited, 24th April 2010
» Real Estate Investment by Foreign Residents : Top Secret – Who Crashed the Economy, 4th January 2012.
» Australia for Sale – Who Crashed the Economy, 27th March 2010.
» Foreign investment is overheating our property market – The Punch, 10th April 2010.
» Secret government business – The Age, 30th December 2011.

It was December 2008. Three months earlier Lehman Brothers had collapsed – credit markets have frozen over. Two months earlier, Prime Minister Kevin Rudd announces the First Home Owners’ Boost, designed to save the housing market, or at least temporary, by encouraging first home buyers to bring forward their purchases and help prop up ailing demand.

By now Australian houses prices had come off 4.7 percent. During all the panic, the Rudd Government announces legislation to ‘streamline’ some of the administrative requirements for the Foreign Investment Review Board (FIRB). According to the Government, the changes would enable the FIRB to concentrate on larger issues in the ‘National Interest’.

But as the Australian public would later learn, this streamlining of administrative requirements really translated into the opening up the floodgates to allow temporary foreign residents such as students to buy property of any value in Australia, effective from the 18th December 2008. Previously they could only spend up to $300,000 on their primary place of residence in Australia.

With the housing market oversupplied, and demand dwindling, many questioned the timing of the announcement. Was it just another measure to save our already highly inflated housing market? If it was, you have to admit it was a genius scheme. Domestically, mortgage approvals had fallen off a cliff. Why not enlist the help of foreigners? It was cheaper, a lot cheaper, than giving first home buyers free money.

By March 2010, the Australian media started asking for data on just how many foreign residents were buying houses in Australia. There were endless reports each weekend of Australian’s being outbid by an army of Chinese residents, effectively pricing Australian’s out of their own housing market. But the ‘streamlining of administrative requirements’ actually meant no records were kept, or more specifically it would seem that these foreign residents no longer needed to lodge applications with the FIRB. There was public outcry and no real data to support just how big or small this issue actually was.

The outcry was so intense, that on the 24th April 2010, a tightening of foreign investment rules relating to residential property was announced, complete with a package of new civil penalties, compliance, monitoring and enforcement measures. The government even set up a 1800 hot-line for residents to report suspicious property buyers and help calm a heated public. It was sold to the Australian public as a reversal of the changes made in December 2008. But some are not convinced.

The problem is, there is no longer any transparency in the sector.

Only on Friday, The Sunday Age’s Property Reporter Chris Vedelago vented his frustration on a Freedom of Information (FOI) request to access this information. He quote’s the government response in his article – ‘‘Around 19 documents have been identified as potentially falling within the scope of your request. Given the nature of the documents I envisage that most, if not all, of the documents will be exempt from release,’’

You must admit, it doesn’t portray a good image of the government. As Chris writes, the FOI wasn’t targeted at troop movements in Afghanistan, the prime minister’s private schedule or the names of ASIO’s anti-terrorism informants? “No, it was a request for some basic facts and figures about the state of foreign investment in Australia’s residential real estate market.”

What do they have to hide? Is there a loop hole in their legislation?

A day after Chris’s article, The Courier Mail reported under the headlines “Foreigners outspend locals on Queensland residential property in 2011″ that foreign buyers’ had spent $334.2 million on residential property in Queensland. Based on research by Colliers International, foreign Chinese increased their spending on Queensland real estate by 50 percent over the year prior, to $106.8 million.

While the figures presented in the article didn’t quite tally, about 70% of the sales were as investments with the other 30% for owner occupiers.

The Weekend Australian Financial Review printed a two page story in the December 17-18, 2011 edition under the headlines of “Chinese prop up property market”. It writes “While vast tracts of the Australian property market suffered the staggers this year, the Chinese kept Harry Triguboff’s cement mixers turning.” If you don’t know, well known billionaire Harry Triguboff AO is managing director of Meriton Apartments, regarded as Australia’s largest property developer. According to the article, 70% of Meriton’s sales are to Asians notably the Chinese.

Justin Wang, founder of Property Investors Alliance told the AFR, “If you sell to demand overseas, then you will find the settlement is not certain. I think the [Australia] government should kept a tight policy and not open the door to overseas investment. It’s very dangerous. The big danger is lots of speculators come here and if something goes wrong, it will crash.” According to figures from BIS Shrapnel and published by the AFR, Justin has 8 percent market share of new apartment sales in Sydney, selling 600 apartments a year, with 95% of them being Chinese.

Justin’s comments makes you wonder what happens when foreign Chinese residents find out that perpetual growth in real estate is not guaranteed and prices can and do fall? – just like what mainland China is experiencing now. Will this cause these investors to abandon Australia, or will it have the opposite effect and they flock here to a ‘strong and stable economy’. What ever the result, we can only have a guess at what the consequences will be without accurate and transparent data on foreign investment in Australia’s real estate market.

And has anyone noticed the Sydney Morning Herald is now reporting on Chinese house prices, down for the fourth month.

» Australia for Sale – Who Crashed the Economy, 27th March 2010.
» Foreign investment is overheating our property market – The Punch, 10th April 2010.
» Australian Federal Government gets tough on foreign ownership rules – News Limited, 24th April 2010
» Secret government business – The Age, 30th December 2011.
» Foreigners outspend locals on Queensland residential property in 2011 – The Courier Mail, 31st December 2011.
» China’s house prices fall for fourth month – The Sydney Morning Herald, 4th January 2012.

With mortgage approvals in Australia falling of a cliff, and Real Estate agents reporting such a strong property market at a time when the market is flooded with near record levels of listings, one has to ask who is buying?

Mortgage approvals in Australia are down 21 percent from its peak in September 2009. The last month of data shows a 7.9 percent fall for January making it the biggest fall in mortgage approvals for a decade. Since then banks have been continuing to tighten loan value ratios (LVR) for both first home buyers and investors, suggesting bigger falls are to come. It is starting to become common to require a 20 percent deposit, which means for both investors and first home buyers, some sizable and solid savings are required before they can enter the market.

Residential property markets around the country are inundated with listings. The Sydney Morning Herald has reported Sydney has a record 2860 houses and units for auction this month, double the 1400 listings the same time last year. Despite this, Real Estate agents are continuing to report a shortage of homes for sale to create an atmosphere of utmost urgency – buy now or be priced out for ever they claim. The Melbourne Age even writes the “Red Hot Melbourne market starts to glow white!”

So if the number of listings is going through the roof, yet the number of loan approvals through the floor, what is underpinning the market at the moment? Cash savings you say – very funny, we spent all our savings years ago.

The answer may come from the easing of restrictions for foreigners to purchase properties in Australia. In 2008 during the GFC, the government needed to find ways to get more money to flow into Australia to underpin the “strength” of our economy. One such way was to remove some restrictions and make it easier for foreigners to purchase property without government or FIRB (Foreign Investment Review Board) approval. The government called it streamlining of administrative requirements.

While all statistics sourced from Real Estate agents and their lobby groups should be taken with a grain of salt, some RE agents are suggesting as much as 30 percent of all residential property sales at present are to foreigners. With a surge in listings, and loan approvals down 21 percent to the end of January 2010, there is no reason to doubt that number. If anything it could be a little light on, but remember Real Estate agents exaggerates the numbers, so potentially the market isn’t glowing as white hot as some would want you to believe. Maybe the white is actually a yellowish-orange tinge at 3200K, not 6500K (degrees Kelvin, a measure of colour temperature).

As these changes to foreign investment were likely to become politically sensitive, no records are kept on the number of purchases made by foreigners. This makes understanding what exactly is happening in the market a difficult one.

On the back of such a strong housing market, the RBA has been cranking up the rates in a bid to slow the market down before it makes our current and unprecedented housing bubble a magnitude worse. But will interest rates have any effect to foreign investors using funds sourced outside of Australia? If the market is read wrong, the RBA could be penalising Australians, both the unproductive property market and productive businesses which underpin and create jobs and real value.

In a finance industry conference held in Sydney yesterday, RBA Governor Glenn Stevens said that if the purchase of property by foreigners who borrow abroad becomes “a large-scale phenomenon,” then raising interest rates in Australia wouldn’t “make any difference to them.”

“[The] question of the role of foreign purchases is an important one and it’s one we’re giving some attention to”, adding that hard facts about the trend is difficult to find. The RBA is closely watching foreign investment in our housing market and if it is contributing to the surge in house prices in recent quarters.

The government now has a big problem, both politically and financially. If they can’t seize back control of the housing market, Australian citizens will be forced to accumulate more debt and spend more on housing expenses as a percentage of the household budget at the expense of discretionary spending further impacting local jobs and businesses. Not only will we not be able to afford basic housing, we will have no jobs.

“In an environment where the affordability of housing is very poor, perceptions that foreigners are fueling house prices could become an issue” for the government, said Shane Oliver, senior economist at AMP Capital Investors.

» Chinese buyers underpin housing prices – The Australian, 27th March 2010.

» Home owners blitz the auction market – The Sydney Morning Herald, 27th March 2010.

For years Real Estate agents have been saying you can’t lose with property. Despite this reassurance, Residex research shows 24% of Sydneysiders who have brought and sold property in the past five years have lost. The average shortfall has been more than $54,000 or in many cases, the value of two years rent.

Residex CEO John Edwards says as many as a third of homeowners who bought their properties in the past five years would realise a loss if they sold today, yet few were aware of their mistake.

The problem comes from over valuation of property. In a slow market, the problem is likely to get worse, and as Australia’s property bubble nears the top the risks of paying too much will greatly increase. Buyers may also overbid with farce competition with cashed up Chinese buyers now that FIRB legislation has been relaxed.

In Melbourne over the same period, 15% of properties were sold at a loss. In Brisbane this decreased to 5.6% and Adelaide recorded 5%.

» Our real estate losers – a quarter of Sydney homeowners have lost money The Sunday Telegraph, 28th February 2010.

» Buy, sell and lose – the property trap – Adelaide Now, 28th February 2010.