Capital expenditure data out yesterday tells you Australia’s economy remains in the doldrums, and will be for a while to come. The other side of the mining boom is proving to be a long, slow slide down a very big hill.
I’ll give you the details in a moment. But first, let’s marvel at the hypocrisy of the real estate industry…because it’s such good sport to do so!
Yesterday, the government announced that it would actually try to enforce existing foreign property ownership laws. It would do so by imposing decent penalties on those (and third party accomplices) who try to break these laws.
Within seconds, the real estate industry was apoplectic. Before viewing the hypocrisy in all its pathetic glory, let me show you what they are actually whining about.
Put simply, the existing law states that all potential foreign investors in residential property need to obtain prior approval from the Foreign Investment Review Board (FIRB). The following quote is from the just released ‘options paper’.
‘The Government’s policy is that foreign investment in residential real estate should increase Australia’s housing stock. Consistent with this aim, different rules apply depending on whether the property is a new dwelling or whether it is an established dwelling.
‘All foreign persons (temporary residents and non-residents) can apply to purchase vacant residential land for development and newly constructed dwellings in Australia.
‘Non-resident foreign persons are generally prohibited from purchasing established dwellings in Australia. However, reflecting the fact that foreign persons who are temporary residents need a place to live during their time in Australia, temporary residents can apply to purchase one established dwelling to use as a residence while they live in Australia. The purchase of an established dwelling is conditional on the foreign person selling the property when they leave Australia. Temporary residents cannot acquire established dwellings for investment (rental) or holiday purposes.’
So foreign investors can apply to buy newly constructed dwellings, but there are restrictions around buying existing housing stock. Foreign buyers are meant to notify and seek approval from the FIRB before purchasing any form of property.
These current laws seem fair enough. The problem is, very few people really adhere to them because the FIRB has virtually no power to monitor what’s going on. If a foreign investor doesn’t make an application to the FIRB to buy property, how is the FIRB going to know?
They won’t. Which is why they haven’t prosecuted anyone in eight years. So the proposed changes are about ensuring compliance with the existing laws.
Beefed up compliance costs money. A new department at the tax office will come into existence and will use data matching capabilities to track purchases and make sure they are within the law.
To fund this compliance and oversight, the government has proposed application fees that amount to around 1% of the purchase price.
In addition, heavy penalties will apply if foreign investors are caught breaking the law. And accountants, real estate agents and lawyers could pay a fine of up to $42,500 for assisting any breach.
Maybe it’s just me. Perhaps I’m missing something. But this all seems fair enough, does it not? The law is designed to encourage foreign investors to increase the housing stock, not join crazy locals in bidding up the existing housing stock to ridiculous levels.
With that in mind, check out some of these quotes that take naked self-interest to a new level. They are from a property PR piece by Robert Harley in yesterday’s Financial Review.
First up is Property Council of Australia Chief Ken Morrison:
‘"This proposal from the federal government would introduce a new federal stamp duty by stealth.
‘"It would be an extension of one of the worst, most inefficient state taxes and Australians are the ones who would ultimately pay the price.
‘"Far from taking the pressure off house prices for Australians, it would drive prices up."’
Next is Sian Sinclair, from Grant Thornton, going into bat for developers:
‘"The fees represent another upfront cost that can deter a significant portion of key investors and in many cases, send them to invest in other shores.
‘"We’re seeing with our clients, those marketing their products to offshore investors are worried about how they sell the additional charge along with threat of significant penalties, when they invest in Australian product.”’
Then there’s Simon Henry, who sounds like he has a bit to lose. He heads up juwai.com, a popular source for Chinese buyers of foreign property:
‘"Requiring a fee to be paid upon application, even if you don’t succeed at buying the property, is certain to turn foreign buyers off. The only countries that charge foreign investor fees are those that are trying to reduce foreign investment."’
Nice try, guys. I call BS on all of your flimsy claims. These proposed changes are simply an attempt to try and enforce the law, a law that you have shamelessly ignored for years so you could get your snout in the trough.
As for foreign investment, Australia does need it. But these changes shouldn’t discourage genuine foreign capital from developing property here, as is the intent of the law. What we don’t need is more foreign capital flowing into the existing property market. It doesn’t add to Australia’s productive capacity whatsoever.
Yesterday’s capital expenditure data made it very clear that Australia does need new investment capital. Seasonally adjusted, investment fell 2.2% in the December quarter, and was 3.6% weaker year-on-year.
But the outlook is even worse. The Australian Bureau of Statistics also monitors capital investment intentions for the year ahead. The first estimate for the 2015/16 financial year was awful. It came in 12.4% below the same estimate for 2014/15.
If the first estimate turns out to be the same as actual investment spend for the year, 2015/16 could see a massive 30% decline in investment! Hopefully, that won’t happen, as subsequent estimates tend to increase as it gets closer to actual investment time. Either way though, the drop off will be large.
Investment in manufacturing is a dead duck. A few years ago, investment in this sector was around $12.5-$13 billion. But it had to ‘make way’ for the mining sector. Next financial year, it will be lucky to hit $7.5 billion. I wonder what it will look like when the car manufacturers leave in a few years?
The bureaucrats scratch their head at all this and wonder where business confidence is. If only confidence would pick up, they think, then we’d be back on track.
So everyone looks to the great confidence booster…the confidence fairy himself, Glenn Stevens, to do the job. Another interest rate cut is pencilled in for next week. Hey, the last 10 cuts in this cycle did nothing to boost confidence…but maybe one more will do the trick?
Actually, that’s not quite true. Interest rate cuts have reduced the burden on the indebted (and taken away from the savers). This frees up cash to spend on consumption, which props the economy up at the expense of other growth avenues, like investment.
It also encourages people to take on debt to speculate on financial assets, rather than invest and real plant and equipment. Residential property is the speculator’s favourite game at the moment.
As a result, the Australian household sector has record mortgage debt levels. Low interest rates have distorted the structure of the economy, funnelling capital into unproductive areas.
Recessions usually punish unproductive investments. When that happens, you get a short slowdown, a reallocation of capital, and growth resumes. It’s the natural economic cycle.
But Australia has been playing this game for decades. Through luck and a constant reliance on easy money, a huge amount of capital has been misallocated.
No wonder businesses aren’t confident! Is another interest rate cut going to make a difference? Of course it won’t. But that doesn’t mean the RBA and confidence fairy Glenn won’t try sprinkling more dust over the economy on Tuesday, when they meet to decide on interest rates.
The Australian economy is running off the rails, dear reader, and no one knows what to do about it. We’re in too deep. Too much debt, too much hubris, and too late to turn back. So we keep ploughing ahead.
for The Daily Reckoning Australia