The Foreign Investment Future

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With Sydney’s clearance rate hitting 87% on the weekend and a modest 3 BRM weatherboard homes selling for $1.36m, (some 40 minutes commute from the CBD), concerns over the role of speculative investment continue.

The ‘golden ticket’ to fast track residential status, the Significant Investment Visa, has seen a five-fold increase in applications over the last year.  This program has attracted$3.2bn in investments. Direct investments in real estate are not recognised as a qualifying factor.The Federal Government has expanded such incentives with the Premium Investment Visa, developed for those willing to make a $15m investment in non-real estate related investments. We commend the government for recognising further investment in real estate undermines the competitiveness delivered by lower land prices.

However the carefully worded statement by Minister Robb announcing the Premium Investment Visas said:

Minister for Trade and Investment Andrew Robb said that direct investment in residential real estate would not be a complying investment under the government’s proposed new Premium Investor Visa (PIV). (emphasis added)

Repeat – ‘no direct investment in real estate’. This implies Real Estate Investment Trusts and other managed investments into real estate are allowed, encouraging both the further centralisation of economic power and additional investments in land. Those in the finance and real estate sectors will be delighted.

The chair of the parliamentary inquiry into foreign investment, Kelly O’Dwyer, said in a speech last week:

Non resident foreign investors, while they can purchase new dwellings cannot generally purchase existing dwellings. Applications to purchase new dwellings are therefore generally granted, while applications to purchase existing homes are only granted if the purchaser is a temporary resident.

So who is a temporary resident and what are the rules? Temporary residents in Australia, that is those people who have a visa to reside in Australia for over 12 months, are allowed to purchase an existing dwelling as a home but they must divest that home within 3 months of leaving the country at the expiry of their visa.

The Committee found that there were loopholes in the current framework – that far from penalising individuals who made illegal purchases, in some instances it rewarded them.

Let me give you an example. If a non-resident foreign person purchased an existing home this would be contrary to the rules. Just as it would be if that non-resident foreign person purchased multiple existing homes.

Under the current regime, if FIRB found out and successfully divested that person of those properties – and those properties had appreciated in value from the time of purchase to the time of sale, that non-resident foreign investor would get to keep the windfall gain.

Clearly this loophole needs to be closed.

Finally a recognition of windfall gains! If the naturally rising value of land is not fit for unlicensed foreign investors, does that mean in time the public will question all windfalls as Unearned Income? If the community creates that value through their development, their existence, shouldn’t they too benefit? O’Dwyer continues:

All foreign investors in residential real estate must apply for approval from the FIRB prior to purchase.

According to the most recent FIRB statistics, last financial year, FIRB approved foreign investment into residential property of around $34 billion, double the $17 billion approved during 2012-13. Much of this investment is concentrated in the Melbourne and Sydney markets. Approximately 80% of total investment is attributable to new property, which at over $27 billion 2013-14 is 170% higher than 2012-13. The total number of established property approvals for 2013-14 is nearly 8,000 as compared to just over 5,000 for 2012-13.

The 8,000 approved foreign investments averaged $3.375 million – with totals up 170%! We fear the foreign investment ‘tightening’ further elaborated on in O’Dwyer’s speech will do little to stem the tide of international capital.The capital gain on a $3.375m investment at the national average of 6.8% for the last year equated to $229,500 (ABS 8 Capital Cities). A $1500 application fee for purchases limited to new stock only, alongside the rigmarole of applying via the Foreign Investment Review Board, will do little when such large amounts are being invested on average.

If the windfall gains for an illegal foreign investor are to be forfeited to the government, then why not all such capital gains? The conflict between sovereignty and savvy investment is mounting in the eyes of the speculative onslaught. Foreign investment is a direct challenge to the control of national resources.

Singapore has taken a more direct approach.

A property sales tax of 18 per cent for foreigners has reduced buyers’ enthusiasm. Levies are nearly as high for those hoping to flip their properties in the first or second year.

As progressive as that is, refinement is needed. A property tax penalises improvements – install solar or renovate and you are penalised under this perverted system. This is not productive. The tax should focus on land values. Rising locational land values are the trigger for property price increases, so that is where the focus need be. The Singaporean property tax does the opposite, by not including any land value. This will encourage run down properties (accompanied by generous depreciation allowances no doubt).

It must be noted Singapore has also imposed additional measures limiting debts to income ratios.

Despite the property tax shortfalls, Singaporean property prices fell 4% last year, with further falls to come. After a close election with foreign investment a major election issue, we hope the political elite can hold their nerve in the face of the predictable vested interests backlash. Perhaps the recent 5 year extension of the tax amnesty on REIT foreign earnings is a payback for such reform.

For Australia, the much vaunted housing supply mantra is being undermined by foreign investment in new homes. New re-zonings are being snapped up off the plan as a safehaven to park money. The mobility of capital is set to increase alongside technology, ensuring the commodification of housing escalates as the global housing marketplace matures. Housing supply alone cannot keep up with international demand for a commodity returning (barely taxed) huge capital gains.

Prosper’s Speculative Vacancies report highlights the underutilised nature of many prime locations. It is important this measure expands to other cities to help the public understand just how extensive speculative holdings of housing are becoming. Then perhaps a more vocal political opposition will develop. Until the unearned incomes in real estate are more highly taxed, the pressures on those trying to find a place to live will continue to grow.

2 Comments

  1. Deborah Frow07-05-2015

    Re your comment on significant and premium investment visas. I read an article yesterday that indicated that the Macquarie Bank has a way around this. They just lend the foreign investor the money on the basis of their “approved” investment!!! I guess there will always be a way to usurp the system.

  2. Karl Fitzgerald
    Karl Fitzgerald07-05-2015

    Mmmm interesting Deborah, of course Macquarie have a work around. If you find a link I’d be most interested.
    cheers

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https://prosper.org.au/2015/02/24/the-foreign-investment-future/