Foreign investors banking wealth in Australian real estate and hurting affordability

Foreign investors banking wealth in Australian real estate and hurting affordability

By Catherine Cashmore
Tuesday, 01 May 2012

Two weeks in a row now I’ve written about affordability issues seriously affecting our home-buying market – principally first-home buyers who, without some kind of family assistance to help with a deposit, often find themselves on the wrong side of the real estate ladder.

Call me a pessimist, but when it comes to Australia’s housing market, if often seems like an insurmountable problem that successive governments find “too hard” to change within their short-term outlook.  It’s not through lack of educated advice.  We’ve had the Henry Tax Review that recommended changes to negative gearing, which, as I pointed out lastweek, needs to be scaled down to ease inner-urban inflation.

In addition, various investigations have been made into the problem of effectively increasing affordable housing stock – such as the McKell Institute’s Homes for All report.  However, they all call for changes that risk polarising opinions and shortening terms in power and as with negative gearing, pressure for policy change continually falls on deaf ears.  Therefore, instead we tend to see solutions employed to bandage over the issues rather than providing any long-term outlook.

Measures such as first-home owners’ grant, which result in quick bumps in inflation followed by fairly lengthy periods of correction, seemingly provide short-term optimism, but over the long term simply escalate the underlying issues of affordability.  Other initiatives such as the national first-home buyers’ savings scheme are worthy ideas, however it was set up in such a way that when first introduced, stringent conditions initially placed limitations on home buyers’ options, thereby deterring significant take up.  Although improvements have since been made, poor marketing and less than a 5% take-up has resulted in many banks withdrawing the option all together.

Of course, you could choose to travel outwards and live in paddock land where real estate is cheaper and houses generally bigger.  However, as numerous media reports have publicised, the woeful lack of community facilities and long commute times to inner-urban employment centers have allegedly resulted in serious medical conditions such as obesity and depression.

OF course, all of this is only going to affect you if you’re a first-home buyer.  Second-home buyers have existing equity to assist them up the ladder, and investors sit top of the pile with generous tax incentives and an increasingly tight rental market to assist cashflow.  The Age recentlyhighlighted the lengths some will travel to run loops around the tax system, with a proportion of investors allegedly structuring loans to divert  rental income from their investment properties directly into their “home loans,” thereby clearing the way to claim a larger slice of tax-deductible expenditure from payments on their investment loan.

There are all sorts of stories of those who try to beat the system. It wasn’t long ago we heard of stories of those illegally claiming the first-home owners’ grant.   Furthermore, Australia’s obsession with seeing housing as a model merely for investment has managed to reach such lengths that we now have a daily house price index specifically modeled to be openly traded on the stock exchange, allowing punters to “bet” on short-term price movements, encouraging the continued obsession with property speculation.

Land banking is another wondrously spruiked initiative – not so bad if you’re securing an older-style house in rentable condition and enabling a tenant to live in the home until it’s either sold or developed.   However, we have no indication on numbers of inner-urban land sites purchased by investors who allow derelict property to sit vacant whie waiting for population growth to inflate the investment as the surrounding finite land gets subdivided into smaller and smaller lots.  The UK market is fast getting initiatives in place to combat this issue; however, it took significant media and people power to start the process rolling.

Recently Robert Doyle – lord mayor of Melbourne – took to the battle ramps to penalise owners of un-used, un-livable, property who allow the homes to sit vacant for years on end.  The owner of a derelict site in Melbourne’s CBD – the old Savoy Hotel on the corner of Bourke and Spencer streets – was approached by the council to turn the area into a playground until the site is sold.  It would enable the land to at least be used by the community until a decision has been made. Needless to say the owner turned down the proposal, preferring to let his eyesore fester. Melbourne City Council is now under pressure to employ a new rates system that will penalise the behaviour. It sounds hopeful, however hope and good intentions are easy to sell and as we all know, often seemingly hard to implement.

However, out of all the models of investment that inspire healthy, contentious debate, there is nothing quite as igniting as foreign ownership of Australian assets – and in particular, residential real estate.  In the latest annual financial report from the foreign investment review board, we learn that in 2010-11 10,293 proposals were received, of which the majority (9,771) were approved for residential real estate.  There is a spike in the figures between 2010-11 compared with 2008-09 simply because hotly contested changes to the rules for temporary residents wishing to purchase property were relaxed by then prime minister Kevin Rudd in the previous year.  Therefore we have no idea of the 2008-09 figures, which – considering relaxation of requirements – were no doubt higher.

Despite the recent doldrums, foreign investment in residential real estate is the playground of the wealthy.  Recently a report by Colliers International outlined that with “an unemployment rate of 5.2%, annual GDP growth of 2.5% and higher yields for prime-grade assets, compared to other global markets’ Australia’s property market is viewed to be particularly attractive”.  CBRE –  “the world’s largest commercial real estate services firm” – earlier this year reported in The China Daily that “more than 1,200 apartments were either planned, being marketed or were under construction by Chinese companies in Australia in the fourth quarter of 2011”.  Accordingly, the company goes on to say: “Foreign developers made up about 30% of the Australian market last year, and China took up 9% of that – an increase over previous years.”

Asian buyers are active in various markets across the globe and principally in Australia because we possess something they don’t have in China – “freehold” laws.  In China, purchasing residential real estate not only requires large deposits as a down payment (some 40% to 50%), the laws surrounding Chinese property ensure there is no private ownership of land, only “rights” to use that land and no guarantee it won’t be whipped away by the government if so desired.   Therefore, as a sales agent from J P Dixon in a recent ‘China Daily’ report so eloquently said: “”Unlike in China, once a buyer purchases property in Australia, it’s theirs forever and can be passed down from one generation to another.”

When you read the requirements published by the FIRB for the purchase of established residential real estate in Australia it seems very straightforward.  For established dwellings, there must be a commitment from temporary residents to use the property as housing and if not seeking permanent residency in Australia at the end of their term, sell the home.  Foreign relatives may purchase on behalf of those with temporary visas under the same requirements.  Companies can also purchase established dwellings as long as the property does not sit vacant for more than six months. If so, it must be advertised and leased on the open rental market.  The application process is simple.  An online form is used and a few boxes need to be ticked requiring the purchaser to disclose intentions for the home.  As can be seen from the figures, putting aside those who withdrew applications, only 42 applications for residential real estate were rejected. Huge numbers are clearly taking advantage of the ability.

It’s interesting however to ponder how many fall through the net. As much as property has been in the doldrums of late and even accounting for our strong Aussie dollar, due to the shortage of land surrounding our capital city locations, property is viewed as a low -risk investment and a safe haven for foreign investors to “bank” their wealth.  In an economy that’s performing as well as ours in comparison to Europe and the USA, coupled with a shortage of live able desirable land plus strong population growth, the prospect of losing money in a property investment long term is a low-risk proposition.

I know from experience in my own field of work, enquiry from the foreign market – in particular Asia – is in abundance, and seeking FIRB approval seems to be a simple online  “take my word for it”,  “box-ticking” process.  For example, those who don’t employ the services of a buyers’ agent (most of whom will check if the client has a legal right to purchase for reasons of liability) will find that when purchasing established or new property – they are not asked for ID when filling in a contract, or evidence they are an Australian citizen or even permanent or temporary resident!  All that most agencies require on a real estate contract is a signature and deposit cheque for – “ideally” – 10% of the purchase price.

A solicitor or conveyancer acting on someone’s behalf is not required to check his or her viability to purchase Australian real estate. Even for those who have been approved by the FIRB  at the present time, there is seemingly no follow up process to ensure the “box-ticked” rules are being adhered to. All we are told in the FIRB financial review is the board is “moving toward a systemic series of targeted investigations of non-compliance by foreign investors.”

Therefore, at the present time, who checks if a property has been sitting vacant for six months or more?  Who establishes whether a home purchased by a temporary resident is sold when they leave the country or simply sits vacant?  In view of the numbers, ongoing regulation under the current system would require significant manpower and considering proof of ID is not a usual requirement when buyers purchase a property, keeping tabs on those who never applied for FIRB approval in the first place would likely fall through the net of observation.

Having said this, in Australia, simply having rules governing foreign investment of established residential real estate is a step ahead of other countries that have no special requirements.  In London for example, anyone can purchase property and the luxury real estate market is booming. Last year a penthouse apartment was sold in Knightsbridge for £136 million and throughout the course of 2011 over £4 billion was transacted by foreign purchasers in the London market, costing the treasury over £750 million a year. Other countries such as Canada and the USA also have no restriction.  In light of this, we should consider Australia on the front foot.

There’s no getting away the fact we sit top of the pile when it comes to issues of unaffordability in the housing market, we have falling numbers of home owners and increasing numbers getting stuck on the rental ladder.  It’s been principally caused by poor planning policies, squashing our population around the capital cities where prices are out of reach for a growing majority.  It’s one of the many reasons we’re heading into a crisis in terms of rental accommodation and public housing.  A shameful position for Australia to find itself in, with larger proportions of our population living in conditions more suited to Third World developing countries than a leader on the world stage.

It’s an issue of many parts and I see nothing wrong with encouraging foreign ownership if it’s going to help increase new supply. However we know from the figures, purchasing established real estate is the preference of the largest percentage of property investors (including foreign investors looking for capital growth) and therefore it stands to reason, to allow more first-home buyers into the market, we should be limiting competition in this sector to slow down inflation and ease supply.

Good supply of rental accommodation is always important, but let ownership of established stock be closely monitored to limit imbalance in the marketplace. If the ability to monitor foreign ownership of established stock – ensuring it’s being utilised in line with current policy – isn’t there, it’s arguable whether we should allow it in the first place?

Real estate prices rising above inflation are not good for the home buyer – only for the seller looking for a windfall, or the speculative investor.  Let’s keep housing’s primary purpose top of mind when designing policy initiatives and ensure our limited established stock and precious inner-urban land favours those who require a roof rather than a speculative investment.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. 

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