Foreign investment into Australian residential property has been a contentious issue of late especially if you live in Sydney and Melbourne with house prices in the 2 major capital cities going beyond the reach of many Australians.  There is constant speculation of illegal activity and constant calls to review the system.

National Foreign Investment & Approvals

As can been seen in the graph above the level of foreign investment approval activity has been tracking up for the last 4 years. The dollar value of foreign investment approvals in residential property ranged between a fairly tight band of approx. $10b to approx. $15b between 2004 and 2013. However, in the last four years we have seen a significant increase from $17B (2013) to $34b (2014) to $60b (2015) to $72b (2016). And the number of applications have risen from an average of approximately 6,500 between 2004 – 2013 to 40,000 in the 2016 financial year.

We welcome most of this foreign investment, the wave of money coming into the economy is creating jobs in the Australian construction sector and increasing the property supply; something that both Melbourne and Sydney need.

What we don’t need however, is foreigners competing against local Australians for established property. Unfortunately, foreigners can buy established property if they are on a temporary visa. I say unfortunately as this form of foreign investment is competing against aspiring local Australian homebuyers of all ages, it isn’t creating any jobs nor is it creating additional supply. This is just distorting local market cycles, putting additional price pressure on established homes near schools in the inner, middle and outer rings of both Melbourne and Sydney pushing locals out of their own property market.

Despite the 15% increase in foreign investment approvals from the 2015 to the 2016 financial year. We saw a decrease in approvals into the established property sector from $11.5b to $7.3b, which is a decrease of approximately 37%.

Foreign Investment & Approvals Into Established Property
(VIC/NSW 2015/16)

Logically this make no sense, but let’s look at some recent events:

• 2nd of May 2015 – Joe Hockey announced his plan to crack down on illegal foreign buyers of Australian real estate. He said ” Australia welcomes foreign investment and Australia needs foreign investment but, at all times, foreign investors must comply with our laws.” He announced amnesty for foreign buyers who have breached the law and encouraged them to come forward. “There is a moratorium until the 1st of December 2015 to come forward if you believe you may have unlawfully purchased residential property in Australia. People will now have 12 months to sell the properties, rather than the normal three-month period, and will not be referred for criminal prosecution”
• 2nd of May 2015 – Divestment orders will be supplemented by civil pecuniary penalties and infringement notices for less serious breaches.
• 2nd of May 2015 – As part of the new reforms to strengthen the foreign investment rules, the Government transferred all residential real estate functions from Treasury to the Australian Taxation Office (ATO). The ATO has the ability to cross reference its own data with third party sources, including FIRB, immigration, AUSTRAC and state and territory land title offices. The ATO has the capacity to cover more than 600 million transactions annually.
• 9th Jun 2015 – The Government will also ensure that people who break the rules do not profit by introducing a civil penalty to capture any capital gain made on divestment of a property.
• 9th Jun 2015 – Third parties who knowingly assist a foreign investor to breach the rules will also be subject to civil and criminal penalties, including fines of $45,000 for individuals and $225,000 for companies.
• 1st December 2015 – Foreign residents who unlawfully purchased established residential property would face increased criminal penalties up to $127,500 or three years imprisonment for individuals and up to $637,500 for companies.

All of these changes have sent a strong message to foreigners that if you buy illegal our country is now serious about enforcing these penalties and if you go down this track you will be caught. The first divestment sale was the forced sale of the $39 million Point Piper Mansion Villa del Mare on the 3rd of March 2015.

And the result was clear in the 2016 financial year a 37% decrease or 4.2b less foreign investment into established real estate – assuming an average transaction of $1M, its possible that there was around 4,200 illegal purchases of established homes in the 2015 financial year alone.

The aftermath of the government being asleep at the wheel prior to 2^nd of May 2015 is we are now all stuck with this ridiculous 12.5% Capital Gains withholding where every sale and every Australian selling real property will need to obtain a clearance certificate from the ATO prior to settlement. Whilst it hadn’t affected too many people as this only concerned transactions over $2M now it now covers every transaction above $750,000, effective 1 July 2017.

The other consequence of this ridiculous strategy is that if I am a foreigner and I have purchased illegally and I know when I sell it’s very clear I am going to be caught, there is a clear incentive on me not to sell. This situation will mean that, the market will generally see less transactions which will not only push up prices but will lock this quality established real estate for decades to come.

This policy is the wrong way around and it’s so obvious that all the government needs to do is to attach tax file numbers to every transaction – this will permanently stop the problem. Then they can gradually make their way back through every transaction over the past 4 years to work out who has purchased illegally.

Two key summary points from this article:

• To date there has been 61 forced sales since the crackdown, which is a combined value of $107 million, when it’s clear this is a multibillion dollar problem. When is this government going to get serious about finding these people and sorting this mess out, and when are they going to do it in a way that doesn’t inconvenience every honest Australian trying to sell their property?
• The second key point is that the majority of temporary visa holders are students. Still they are permitted to buy established property using funds from their wealthy overseas families. Which begs the question, why would we want wealthy overseas families sending a constant multibillion shock wave of capital through our established housing market in Melbourne and Sydney?

This is an obvious loop hole than can be fixed quickly, improving housing affordability for all home-buyers in Melbourne and Sydney by restricting foreign investment to the new and off plan sector only. Immediately the net effect, if we take the average 2015 & 2016 figures would have been $2.7b in NSW and 3.3B in VIC pumped back into the creation of new supply, creating more jobs and easing housing affordability pressure in the 2 cities that need it most.  With all the noise around about housing affordability in Melbourne and Sydney, it’s bizarre that this issue is not being discussed.