Following the release of the Report on Foreign Investment in Residential Real Estate from the House of Representatives Standing Committee on Economics in November 2014, the Australian Government has today released a consultation paper on proposed reforms.
According to Foreign Investment Review Board (FIRB) statistics, The House of Representatives Standing Committee on Economics’ report indicated that “approved” foreign investment in Australian residential property has been surging in recent years. It cited in the first 9 months of last year, prior to the release of the report, foreign investment surged 44 per cent compared to all of 2012-2013 with “much of this investment [..] concentrated in the Melbourne and Sydney markets.” Fairfax tabloids in Sydney and Melbourne have been littered with articles of Chinese buyers outbidding locals with prices exceeding reserves in the hundreds of thousands.
Leading property experts say the Sydney property bubble has been in “hyperdrive” with prices surging almost 30 per cent in just two years, creating a challenge for the Reserve Bank of Australia who is keen to slash the official cash rate to stem rapidly rising unemployment. With house prices at ten times income, Sydney is the third most expensive city in the world for housing following Hong Kong and Vancouver, according to the most recent Demographia survey. Melbourne is not far behind as the fifth most expensive city in the world for shelter.
It is unclear what contribution Foreign investment is making to surging home prices. The Australian Bureau of Statistics (ABS) told the House of Representatives Standing Committee on Economics inquiry, data on foreign investment is “patchy”. It regularly scanned trade magazines and newspapers to try to ascertain the level of foreign investment:
“We do scan press reports and real estate specialist magazines to try to identify purchases of real estate, and [to] record those and record valuation changes from those. But I have to say, that’s a bit hit and miss,” assistant statistician Paul Mahoney said.
Treasurer Joe Hockey said today, “At the moment we simply do not have enough data and that’s because no-one has taken foreign investment regimes seriously in the past.”
Currently flouted legislation do require all foreign persons to gain approval prior to purchasing residential real estate in Australia. To encourage the supply of new homes, non-residents can only apply to purchase newly constructed dwellings or vacant land for development. Given that temporary residents residing in Australia need a place to live, temporary residents may purchase one established dwelling to live in, but must sell the property when they leave Australia.
Today’s consultation paper recommends the introduction of fees for foreign buyers of Australia’s residential real estate. A token application fee of $5,000 would apply for properties under $1 million dollars. Properties over $1 million would attract a fee of $10,000, with $10,000 increments for every 1 million dollars thereafter. The report notes the FIRB and Treasury (who provides secretariat support to the FIRB) is currently funded through consolidated revenue and suggests the Australian Taxpayer should not bear the costs of foreign audit, compliance and enforcement operations – sensible budget savings.
The report on Foreign Investment in Residential Real Estate released last year also recommended a user pay model but with a modest fee of only $1,500 to fund “enhanced audit, compliance and enforcement capacity within FIRB.” On the other extreme, Today’s report notes countries such as Singapore and Hong Kong levy an additional buyer’s “stamp duty” of 15 per cent of the purchase price. (Maybe we could do the same with proceeds to help fund the Committed Liquidity Facility?)
Just as laughable as the ABS scanning magazines to ascertain foreign investment is the FIRB’s track record on enforcement. It’s a point not lost on Prime Minister Tony Abbott who said in a National Press Club speech last fortnight, there had not been a single prosecution in six years.
The consultation paper highlights, “while the Foreign Investment Review Board and Treasury were well placed to continue undertaking the upfront screening of residential real estate applications, its internal processes and lack of specialist investigative and enforcement staff have weakened the enforcement of the foreign investment rules.”
A recommendation is to create a new “specialist, dedicated compliance and enforcement” unit within the Australian Taxation Office to enforce foreign investment legislation for residential real estate. It suggests the tax office is better suited as it has staff with compliance and enforcement skills, sophisticated data-matching and “experience in pursuing court action”, i.e. a proven track record of getting results!
While this may be a consultation paper, it is understood from an interview two weeks ago that Prime Minister Tony Abbott has taken immediate action, directing Treasury to start issuing divestment orders for immediate sales of illegal purchases.
The next target for the Abbott government is expected to be limited recourse borrowing arrangements by superannuation funds.
» Strengthening Australia’s Foreign Investment Framework – The Treasury, Australian Government – 25th February 2015.
» Report on Foreign Investment in Residential Real Estate – House of Representatives Standing Committee on Economics, November 2014.
» PM Tony Abbott orders Treasury squad to force immediate sales on foreign property investors – The Daily Telegraph, 13th February 2015.
» Australian housing overheating and could eventually face a correction: Moody’s – Who crashed the economy?, 29th June 2014.
» Report into foreign investment in residential real estate could come too late – Who crashed the economy?, 19th March 2014.
» Real Estate Investment by Foreign Residents : Top Secret – Who crashed the economy?, 4th January 2012.