‘Australia joins crackdown on landlords’headlined the Financial Times this week. Well, hot diggety, hold your horses, editor! Australia hasn’t actually done anything yet.
What’s the big deal? The headline was referring to the parliamentary enquiry into foreign investment in Australian real estate. The enquiry made twelve proposals. The real question is: will anything actually change?
Let’s back up a bit in case you haven’t been following the story. The federal government commissioned a report to establish the benefits of foreign investment in Australian property. The government wants to know whether offshore investors are increasing the housing supply and boosting the local economy — and if anything should change in the regulation framework.
That’s the PR spin, anyway. I doubt the government particularly cares to know the answer to any of those questions. I imagine the report is more of a political manoeuvre than anything else. If that’s right, you can guess the motivation — a self-serving one!
Here’s an admission you might find compelling. One of the key findings of the report: ‘There is no accurate or timely data that tracks foreign investment in residential real estate. No-one really knows how much foreign investment there is in residential real estate, nor where that investment comes from.’
In short, the government doesn’t know, because they don’t want to know. I mean, we all have to fill out a tax return to the last cent, but jeez, I guess it’s all a bit too hard to come up with a way to track this kind of thing.
What’s also odd is the Chair of the report, Kelly O’Dwyer, makes various claims about foreign investment being ‘vital’ and not causing ‘distortions’ or pricing out first home buyers. But if nobody knows how much foreign investment there is, on what does she then base those claims?
It would appear the Foreign Investment Review Board (FIRB) might actually be entirely useless.
Non-resident foreign investors are not supposed to be able to buy existing housing stock. The justification for their money in the first place is its use to increase the housing supply and support the building industry. But do they buy existing homes? Yes, apparently so. They can then walk away with the capital gain. What’s happened as a consequence? Nothing.
Here’s the Chair of the report, Kelly O’Dwyer:
‘During the course of the inquiry, it came to light that no court action has been taken by FIRB since 2006. During the entire Rudd-Gillard-Rudd Government, not one divestment order was issued, which means not one government sale of illegally acquired property was made.
‘This compares with 17 divestment orders between 2003 to 2007 when foreign investment in residential real estate was at much lower levels. FIRB was also unable to provide basic data on voluntary divestments.’
Make sure you pay your income taxes though. Don’t you dare disobey.
If the government follows through on the recommendations of the report, there’s no doubt the process of foreign money coming into Australian property would become more transparent. That’s not a trait governments are famous for. Watch this space.
Of course, the amount of money going into Chinese real estate was also in the news this week. The Australian Financial Review reported on Friday that the Chinese government is planning to buy homes from commercial developers to prop up the market. The government said it would use the properties as social housing.
According to the article, it’s estimated that there are 3.8 million new homes empty across the country. That gives fuel to the idea that the Chinese property market is dangling on the edge of collapse.
That’s a possibility. Who can really say? However, what the article doesn’t tell us about those empty homes is the holding cost of owning those properties. The Globe and Mail reported back in September that the Chinese government is only now beginning to try and formulate a nationwide tax policy.
Why is this important? As the article put it, ‘Chinese property owners have enjoyed a free ride to wealth driven by scorching growth in home prices and a lack of property taxes to whittle away the gains.’And not only that, they use ‘second and third properties as fee-free savings accounts’.
That is to say, if the holding costs of these properties are low, they can sit there empty. Owners are unlikely to generate a wave of selling to jeopardise the Chinese economy in the critical way a lot of people still worry about. The tax isn’t going to happen anytime soon either, by the looks of it. It’s something to watch for, however.
Why does Beijing want to roll out the tax anyway? One is to rationalise the unsustainable way local governments finance themselves. Currently, they flog off land to developers. That can’t last, obviously. Another goal? According to the article, it’s also‘to lower housing prices, and also to reduce speculation’.
No wonder the Chinese love investing in property in Australia, the UK and the US. They don’t run into much trouble like that.
Editor, Markets and Money
Ed note: The above article was originally published in Markets and Money.