Government Crackdown on Foreign Property Investors Nets ‘One’ Casualty

Growth in Real Estate with Magnifying Glass
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The government’s plan to limit foreign investment in Aussie property is flopping. In February this year, the Foreign Investment Review Board (FIRB) was tasked with clamping down on illegal home purchases by overseas buyers. Since then, only one Chinese buyer has been forced to sell up.

As you can imagine, this isn’t reflecting positively on the government, or their policies. It seems hard to believe that only one buyer has flouted the rules in over five months. Supposedly, a further 195 cases are being investigated. But it just goes to show how difficult it is for authorities to find evidence of foul play.

The one case they did successfully investigate and prosecute involved a company registered in Australia. Further investigations into parent companies proved direct links to Chinese property giant, Evergrande.

The laws on foreign ownership of Aussie real estate are simple enough to understand.

Currently, investors require the FIRB’s approval when buying into the market. Foreign buyers aren’t allowed to purchase residential homes in Australia. They must reside in Australia to do so. But, should they leave the country, the law requires them to sell up. A problem for the FIRB is that many buyers, who have left the country, are still suspected of owning homes in Australia.

Why the government is concerned about foreign investors

The government want to limit the effect Chinese buyers are having on house prices in Sydney. Their worries come on the back of concerns about spiralling values and affordability. By stemming the stream of foreign investors, they claim it would ease pressure on house prices.

Of course, putting all the blame for rising property prices on Chinese investors is lazy. And it unfairly shifts all the blame away from local investors. But their contribution remains significant nonetheless.

We know from official data that Chinese buyers purchase up to a quarter of all new homes in Sydney. That’s nothing to scoff at.

Chinese investment has contributed its fair share to Sydney’s 40% price growth since 2012. And since wealthy investors typically buy in at the steep end of the market, they skew house prices. At last count, median prices were over $900,000 in Sydney.

Is the government serious about limiting Chinese investment?

The government’s attempts to limit Chinese investors appears to be nothing but lip service. As long as public angst remains focused on the Chinese, the government can sidestep the issue of why housing affordability is so bad.

Just look at their new measure set to take effect in December.

From then, all foreign investors will be slapped with a $5,000 application fee on new homes. That’s hardly going to stem the tide, is it? Someone willing to stump up millions of dollars isn’t going to lose sleep over an extra $5,000.

What’s more, we’re still waiting on new measures agreed upon last year. The long awaited national register of foreign buyers remains a work in progress. That’s being designed to create a database of foreign investor citizenships. It was meant to give us a better picture of total foreign investment. Yet it remains nowhere to be seen.

Whatever way you look at it, it doesn’t seem as if the government is serious about addressing Sydney’s surging price growth.

And house prices aren’t likely to get any more affordable in the coming years. Let me explain.

Where will Chinese investment in Aussie property end?

The share of China’s investment into Australian real estate is only set to rise in the coming years.

A recent Credit Suisse report highlighted that Chinese investment will grow to $60 billion by 2020. They also stated Chinese demand for all new homes supplied will rise to 20% by 2020. Most of that investment is likely to end up in Sydney. There are three reasons for this.

One is Sydney’s appeal as a global city, already home to a Chinese diaspora numbering almost 300,000. The second is our proximity to China, making for easy travel between the two countries. With that also comes the added benefit that we share a similar time zone. Last, but by no means least, Sydney property prices are growing faster than almost anywhere else in the world.

These factors make Sydney one of the most attractive destinations for Chinese investors. And it’s why one Sydney based property agency is very optimistic about the future. They say that Chinese buyers will keep prices on an upward curve for at least three more years.

So what will it take to dampen Chinese investor enthusiasm? There is one thing…

If the Aussie economy flat lines, housing demand will too

It goes without saying that a slump in economic growth will lower demand for housing. Over the next few years, the effects of a tapering mining boom will become more pronounced. With low wage growth, and higher unemployment, housing demand would fall accordingly.

Some economists even say that Australia has a problem with housing oversupply. All it would take to expose that would be for demand to collapse.

If the economy does decline, which appears probable, two things will happen. At first, foreign investors will help offset a growing imbalance between demand and house prices. After that, foreign demand will fall as well — if price growth eases considerably.

But it may be a long time before this drags on Sydney’s market. It’s a twisted logic, but a slowing economy is likely to hit Sydney’s real estate market last. That’s because markets outside Sydney and Melbourne are already declining.

If the economy holds steady, then investor confidence in Sydney is unlikely to slump anytime soon. According to our property expert, Phillip J. Anderson, Aussie real estate is still a long way from hitting its peak. In fact, he believes this boom we’re in will last for another decade.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is — and where it’s going.

He predicted the 2008 housing market crash. He also went against the trend in 2009, saying that house prices would go on to boom this decade. He was right on both accounts.

In his latest free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

Mat Spasic,

Contributor, The Daily Reckoning

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The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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