Foreign Investors – Page 3 – Digital Finance Analytics (DFA) Blog

Foreigners can buy failed off-the-plan

The government is bringing in changes to foreign investment rules to protect developers who are left in the lurch when a settlement falls through.

The changes will allow foreign buyers to purchase an off-the-plan dwelling when another foreign buyer has failed to reach settlement, meaning developers won’t be left out of pocket.

It comes amid reports of a growing number of Chinese buyers failing to settle in off-the-plan property sales.

Overseas investors are allowed to purchase new Australian dwellings in a bid to encourage developers to build more houses and apartments.

Australian Property Just One of Many Markets Of Interest To Foreign Investors

Globalisation has opened up property markets around the world, with cashed up investors from China in the market snapping up overseas homes at an accelerating pace. They’re also venturing further afield than ever before, spreading beyond the likes of Sydney and Vancouver to lower-priced markets including Houston, Thailand’s Pattaya Beach and Malaysia’s Johor Bahru; according to Bloomberg.

If they were anywhere else in Beijing, the five young women in cowboy hats and matching red, white, and blue costumes would look wildly out of place.

But here at the city’s biggest international property fair — a frenetic gathering of brokers, developers and other real estate professionals all jockeying for the attention of Chinese buyers — the quintet of wannabe Texans fits right in. As they promote Houston townhouses (“Yours for as little as $350,000!”), a Portugal contingent touts its Golden Visa program and the Australian delegation lures passersby with stuffed kangaroos.

Welcome to ground zero for the world’s largest cross-border residential property boom. Motivated by a weakening yuan, surging domestic housing costs and the desire to secure offshore footholds, Chinese citizens are snapping up overseas homes at an accelerating pace. They’re also venturing further afield than ever before, spreading beyond the likes of Sydney and Vancouver to lower-priced markets including Houston, Thailand’s Pattaya Beach and Malaysia’s Johor Bahru.

The buying spree has defied Chinese government efforts to restrict capital outflows and shows little sign of slowing after an estimated $15 billion of overseas real estate purchases in the first half. For cities in the cross-hairs, the challenge is to balance the economic benefits of Chinese demand against the risk that rising home prices spur a public backlash.

“The Chinese have managed to accumulate very large amounts of wealth, and the opportunities to deploy that capital in their own market are somewhat restricted,” said Richard Barkham, the London-based chief global economist at CBRE Group Inc., the world’s largest commercial property brokerage. “China has more than a billion people. Personally, I think we have just seen a trickle.”

While a dearth of government statistics makes it difficult to gain a comprehensive view of cross-border real estate investments, most industry projections point to a surge in Chinese purchases. Ping An Haofang, an online real estate platform owned by China’s second-largest insurer, says its $15 billion first-half estimate, derived from market data, nearly matches the figure for all of 2015.

Fang Holdings Ltd., the country’s most popular property website, predicts overseas buying on its system will increase 130 percent this year, while transactions through September at Shenzhen World Union Properties Consultancy Inc., China’s largest broker for new-home sales, were already 50 percent above last year’s level. The country overtook Canada as the largest source of residential purchases in America last year after an estimated $93 billion of buying from 2010 to 2015, according to a May report by the Asia Society and Rosen Consulting Group.

It adds up to the world’s biggest-ever wave of overseas residential property investment, according to Susan Wachter, a professor at the University of Pennsylvania’s Wharton School who specializes in real estate markets. While Japan had a similar boom in the 1980s, it was mainly focused on commercial buildings, Wachter said.

Today’s Chinese buyers have a long list of reasons to flock overseas. The yuan’s slump is eroding their purchasing power, while returns on local financial assets — including stocks, bonds and wealth-management products — are shrinking as the $11 trillion economy slows.

Chinese real estate, meanwhile, has grown increasingly out of reach after a speculative boom sent domestic home prices to all-time highs. Residential property values in Shenzhen, Beijing and Shanghai all jumped more than 30 percent in the year through September, according to the National Bureau of Statistics.

“Properties in Shanghai are ridiculously expensive,” Chen Feng, 38, said as he evaluated prospects at a property fair in Shanghai in September, lured by television commercials for the event the night before. “With the amount of money it takes to buy a small apartment here, I can buy a building of apartments in many places in the world.”

That line of reasoning is nothing new, of course. Sydney, Vancouver, Hong Kong, London and a handful of other cities have long been popular destinations for Chinese buyers.

The difference now is that those traditional hotspots are starting to lose their appeal, due to soaring prices and new measures to deter an influx of overseas money. In Hong Kong, the government enacted a 30 percent tax on foreign property owners this month after Chinese demand pushed home values toward record highs.

The risk of similar measures in other cities can’t be ruled out as politicians including Donald Trump, the U.S. president-elect, tap into local discontent over rising living costs, according to CBRE Group’s Barkham.

Ocean Views

Chinese buyers have responded by branching out to cheaper cities. In the U.S., they’re increasingly searching for properties in Houston, Orlando and Seattle, which displaced San Francisco in the first quarter as the third-most viewed U.S. market on Juwai.com, a Chinese search engine for offshore real estate.

At the national level, countries in Southeast Asia have grown more popular. Juwai.com’s queries on Thailand are surging at a 72 percent annual rate, helping it surpass Britain as one of the top five most-targeted destinations worldwide earlier this year.

In Pattaya Beach, Chinese investors have snapped up 20 percent of the luxury condos on offer from Kingdom Property Co. over the past year. The properties offer Gulf of Thailand views for as little as $120,000, or less than a quarter of what buyers would pay for a typical apartment in central Shanghai, according to Han Bing, a 30-year-old anchor in Chinese television shows who doubles as a sales agent for the Bangkok-based developer.

“It’s a cool bargain for a retirement plan,” Han said.

Capital Controls

In the Malaysian state of Johor, across the Northern border of Singapore, major Chinese builders including Country Garden Holdings Co., Greenland Holdings Corp. and Guangzhou R&F Properties Co. are all developing new projects. Country Garden agents handed out fliers for the firm’s $37 billion Forest City development at the Beijing property fair in September, advertising permanent property rights, zero inheritance taxes, long-term residence visas and high-quality hospitals.

One challenge for Chinese investors is getting money out of a country that caps individuals’ foreign-currency purchases at $50,000 a year. While that limit hasn’t always been strictly enforced, the yuan’s slump is prompting policy makers to clamp down. This year, they’ve banned the use of friends’ currency quotas, curbed on the cross-border activities of underground banks and asked lenders to reduce foreign-exchange sales.Still, alternative routes abound. Many business owners finance their homes through offshore trading companies, while some Chinese developers allow clients to pay for overseas units in yuan. Foreign-currency mortgages also play a role, helping to fund more than 80 percent of China’s international property purchases, according to an estimate by Fang Holdings based on user searches and surveys.

Planning Ahead

“Where there’s a will, there’s a way,” said David Ley, a professor at the University of British Columbia who wrote a book on the flood of wealthy migrants from east Asia in the 1980s and 1990s.

This year’s purchases could be just be the tip of the iceberg. Chinese holdings of global real estate, including commercial properties, will probably swell to $220 billion by 2020 from $80 billion in 2015, according to Juwai.com.

As the first generation born after China’s opening in the late 1970s approaches middle age, many of them want an overseas base for family members to travel, study and work. Chinese parents with children at foreign schools have been a major source of demand, accounting for an estimated 45 percent of cross-border buying, according to Fang Holdings.

Zha Liangliang, a 31-year-old owner of commercial wheat farms in China’s eastern Jiangsu province, said he purchased a $587,000 apartment in Sydney in August and plans to add five more before sending his children to high school in Australia. He’s flying to the country this month to view homes and farmland, hoping to buy before the yuan weakens any further.

For some investors, it’s never too early to pull the trigger. Richard Baumert, a partner at Millennium Partners Boston, tells the story of a 33-year-old Chinese man who purchased a luxury home for his future children in August, convinced they’re destined to attend one of the city’s prestigious universities.

The buyer shelled out $2.4 million for the property, Baumert said, unfazed by the fact that he’s single and it could be two decades before he has kids old enough for college.

The Rise Of The “Non-Resident Reference Rate”

From Australian Broker.

Westpac will soon increase interest rates for foreign mortgage customers, reports the Australian Financial Review.

In its column, Street Talk, the paper says that the major bank will introduce a new loan category, Non-Resident Reference Rate, next month. Customers falling under this category will be required to pay a 0.5% higher standard variable rate.

These changes will affect offshore-based customers who currently have loans with the bank and not Australian citizens or residents.

The decision is the latest in a long crackdown by the major banks on foreign lending spurred on due to the difficulty in securitising these types of loans.

Talking with the Australian Financial Review, a Westpac spokesperson said that the higher rates took into account the bank’s “risk settings, the economic landscape, and expected changes in capital requirements for that segment of the mortgage market”.

As of 26 April, Westpac announced it would no longer loan money to foreign home buyers seeking to purchase residential property – meaning that the bank has not settled any new mortgages from offshore-based clients since then.

A spokesperson confirmed with Australian Broker that offshore loans were a small part of Westpac’s portfolio as well.

Other major banks such as NAB and ANZ have also introduced similar policies halting new loans to foreign buyers.

Westpac has also dropped its loan-to-valuation ratios (LVRs) from 80% to 70% for local applications that include foreign income.

Chinese ‘upgraders’ adding new twist to real estate boom

As Chinese buyers gain residency, they also want to move into existing homes partly so they don’t have to compete with foreign investors buying overpriced apartments. From News.com.au.

Shanghai-born accountant Vincent Liu, 33, moved to Sydney around 10 years ago to complete his Masters degree. After renting in three different suburbs, he finally bought an apartment in Macquarie Park in 2012 for $570,000.

But with a young daughter and family, he’s already to keen to move out.

“A lot of my friends and schoolmates are in a similar situation,” he said. “We bought apartments or units around 2012 or 2013, now most of them have kids or are planning for the next stage of their life.”

Mr Liu said another concern for this group was the potential oversupply in apartments, making houses or townhouses with land attached a more attractive long-term investment.

“[But] I don’t think they’re going to sell just because of price fluctuation in the short term, unless something major happens,” he said. “For Chinese people, growth is not their major concern, it’s about putting money in a safe place.”

And as Chinese buyers gain residency, they also want to move into existing homes partly so they don’t have to compete with foreign investors buying overpriced apartments.

“For new migrants I don’t think apartments are going to be a good option now, especially if they don’t want to compete with foreign investors,” he said. “It’s better to save a little bit more [and wait].”

Mr Liu argues Australians concerned about rising house prices due to foreign investment should blame the government — not the Chinese.

“Australia is gathering investment from all over the world, your economy got a boost based on that,” he said. “Yes, local residents in Sydney or Melbourne might suffer a little bit but in the end it’s the all the government’s call.

“You want the investment, you introduce the money, now your residents are suffering because of your decision. It’s not one single factor that caused the situation.”

According to Mark Lauzon from Sotheby’s International Realty, the Chinese “came for the education and ended up staying for the lifestyle”.

“A lot of these couples arrived as single students, decided to start a career here after graduation and ended up marrying either another student from overseas or a local,” he said.

Mr Lauzon said he was currently selling a penthouse apartment in Waterloo owned by a couple from China. “Their penthouse is big enough for a family, but the vendors would like to move to a house or terrace to raise kids,” he said.

“In part, they are worried about having children on a high-floor apartment with balconies.

“They are hoping to stay in same area. The challenge for young families in Waterloo, Zetland and much of South Sydney is that there is a shortage of stock of single-family homes, and there aren’t many school catchments. They also look at Kensington and Surry Hills because there are not enough primary schools in this part of Sydney.

“People in South Sydney have really embraced apartment living. In terms of family-friendly, they prefer to look at terraces.

“Many of these vendors are very loyal to the area. They like this area because of its good infrastructure, transit, restaurants and shopping.”

James Pratt, director of auctions for Raine & Horne and J Pratt Realty, said a three-bedroom house in Zetland which recently broke the suburb price record went to upgraders.

“The buyers were Chinese, looking for a good place to raise a family,” he said.

“We are seeing Chinese upgraders at auctions in numbers I don’t recall seeing before. More and more, I am auctioning their units for them, and then see them bidding for the house they want to move to.”

Mr Pratt said so far this year he had sold around 26 entry-level apartments in South Sydney for Chinese-origin owners who were moving to a terrace or house. “Most of these buyers by now have Australian permanent residency,” he said.

Jackie Wang from Raine & Horne Ashfield said with the busiest time of the year, the spring selling season now here, she was expecting many more transactions over the next three months.

“Different from overseas Chinese buyers, local Chinese buyers are not bound by law to purchase brand new property, and they are more into existing homes,” she said.

“First home buyers are usually searching for old unit in a good location which can be owner occupied for a few years, then easy to rent out as investment once they are ready to upgrade to a house.

“Upgraders are more attracted to houses with nice features and space for the growing family. They live in a unit or apartment and are planning to upgrade to large semis or houses in the nearby area.

“From the recent sales around Ashfield area, I can see a lot of local Chinese upgrade buyers still have strong interest in Torrens title properties, especially the local upgraders.”

In just the past five years, Chinese investment has grown from 10 per cent to 25 per cent of all foreign real estate investment in Australia.

According to Gavin Norris, Australian head of Chinese real estate portal Juwai.com, there were potentially several thousand Chinese-origin households in this situation, “ready to move up the property ladder in the traditional Australian way”.

“Chinese buying in Sydney only really began in earnest in about 2009,” Mr Norris said.

“A home to live in while studying in Australia is the biggest driver of Chinese property buying in the big capital cities like Sydney. Now that the significant Chinese investment trend has passed the half-decade mark, these buyers are starting to age out of their first purchase. Many of them have married and are starting families.

“One out of every three people living in some Sydney suburbs, such as Haymarket and Ultimo, is a student from overseas. And 39 per cent of Sydney residents overall were actually born in another country — so this is potential a very large group of new buyers looking to purchase.

“The fact that so many of these buyers intend to hold onto their first purchase as an investment, rather than sell it to fund a larger new home, shows their frugality and dedication to real estate as an asset class.”

Fintech Offers New Escape Route For Off The Plan Investors

From Fintech Business.

A new off-the-plan property sale platform has been launched to cater for foreign investors who are looking to on-sell their investment via nomination before the settlement date.

Aofun.com.au has launched an online platform that will allow property buyers, who have made down payments on off-the-plan properties, the opportunity to on-sell their investment via nomination before settlement.

The platform is primarily targeted at foreign investors who have been ‘caught out’ by the major Australian banks’ decision to tighten their lending to foreign investors.

Aofun founder and chief executive Jason Zhu said many potential sellers who bought an off-the-plan property in the past few years now have “little or no” chance of securing finance.

He said some of these sellers may be willing to forgo the full 10 per cent deposit.

“There is a real opportunity for first home buyers who may not have sufficient savings for their first home to register on the website and acquire their first home with the deposit paid,” Mr Zhu said.

He added that the Aofun platform allows the original buyers to list their property, and hopeful buyers can make an offer.

“Buyers and sellers can then negotiate the final sale price on the property via the online portal. The sale will then proceed through all the normal legal processes.”

Many original buyers may be willing to sell below the original contract amount to avoid a potential lawsuit from the property developer or to avoid receiving a bad credit rating – factors that “may have negative implications for any future immigration application to Australia or investment in Australia,” according to Mr Zhu.

“The reality facing the market is that many of the overseas buyers of these properties, for various reasons, are not going to able to complete their purchases, leading to an oversupply that will inevitably place a sizable burden on the property and construction industries.”

The ‘Huge Uncertainty’ in Some Australian Apartment Markets

From Business Insider.

Australia is building an extraordinary number of high rise apartments right now. Everywhere you look, there seems to be a new development under construction, especially in Australia’s southeastern capitals.

And, going off recent building approvals data, it seems that there are a whole lot more coming.

Like a number of other commentators, Bill Evans, chief economist at Westpac, is uneasy about Australia’s high rise construction boom, stating in a research note released today that “huge uncertainty prevails in this market”.

The source of this uncertainty, says Evans, is the heavy involvement of Chinese buyers in the market, something that has helped propel the building boom in recent years along with the increased prevalence of housing investors.

“The number of high rise apartments currently under construction in March this year (ABS latest) has surged to 110,000 – including 44,000 in New South Wales; 34,000 in Victoria; and 23,000 in Queensland,” says Evans.

“However, a significant proportion of the buyers are offshore based, so called FIRB buyers,” he adds.

According to a recent survey conducted by ANZ in consultation with the Australian Property Council, foreign investors accounted for 23.9% of all property sales in Australia during the June quarter of 2016. The proportion of sales in Victoria and New South Wales were the highest in the country, accounting for 30.8% and 25.4% of all sales over the same period.

With so many apartments being sold to foreigners, many of them to Chinese, it is clear that much of the residential building boom, and beyond that the outlook for prices, is determinant on the continued involvement of foreign investors.

According to Evans, this creates heightened risks for the sector should the buying start to dry up.

He suggests that recent moves from Chinese policymakers to stymie capital outflows from the country not only heighten risks for apartment prices and settlement on newly constructed apartments, but are also a crucial cog in Australia’s economic transition, the booming residential construction sector.

“At some point, the Chinese authorities, who appear to have stabilised last year’s spectacular near USD 1 trillion loss in foreign reserves, may decide to slow this leakage,” says Evans.

“Certainly we have seen marked evidence of a tightening of capital controls, particularly for the non-corporate sector. That tightening of capital controls might also impact the construction boom.”

Adding to the uncertainty, Evans says that Australian banks have stopped funding FIRB buyers, suggesting that this presents “risks to local developers who may have sold more than 50% of their stock to these buyers”.

“It is generally accepted that apartment buyers in the Melbourne CBD have incurred some capital losses, while Sydney purchasers are seeing their profits squeezed,” he says. “These liquidity and capital loss prospects may discourage foreign buyers, with the result of sharply slowing the apartment construction cycle.”

Evans, like others, is unsure how it will all play out, noting that possible outcomes range “from ongoing spectacular momentum to a sudden liquidity driven slowdown”.

In the case of the latter, he says “one part of the recent boost to Australia’s growth story might fade quickly”.

The sentiment expressed by Evans is similar to that communicated by a growing number of analysts.

In a research note released in early September, Ivan Colhoun, chief markets economist at the National Australia Bank, suggested that the presence of a large numbers of foreign investors in these markets complicates not only the outlook for prices but also settlement risks.

“Recent trends and reports suggest there has been a modest increase in delays in settlement rather than outright non-settlement. And it is typically foreign buyers that are now finding it somewhat harder to access finance and/or expatriate finance (the latter largely from China),” he wrote.

Cameron Kusher, research analyst at CoreLogic, suggested in May that tighter restrictions on overseas buyers from Australian banks was a factor that could amplify settlement risks for newly built apartments in the years ahead.

“Mortgage lenders have recently tightened their lending criteria, subsequently some people who have committed to off-the-plan units may not be able to borrow as much as they could at the time of signing the contract,” said Kusher.

As a result, Kusher noted that there was a clear risk that some properties may be be worth less than the price they were purchased for, heightening settlement risks.

“Many of the units are coming up for settlement in similar locations and will compete with existing unit stock,” he said.

“With so much stock coming online at once there is an increasing concern as to whether settlement valuations will actually meet the contract price of these units.”

Government Trumpets Foreign Buyer Clampdown

In a statement today, the Treasurer highlighted further forced sales and fines imposed on foreign investors who have purchased a residential property. The body count is 46, with 400 still under investigation, so the number of actions, and amounts involved are very small, when compared to the whole market.

Treasurer the Hon. Scott Morrison has ordered the divestment of a further 16 Australian residential properties that have been held by foreign nationals in breach of the foreign investment framework, taking the total purchase price of Australian residential real estate divested to over $92 million.

“The divestments of these 16 properties, which have a combined purchase price of over $14 million, are further evidence of the Turnbull Government’s commitment to enforcing our rules so that foreign nationals illegally holding Australian property are identified and their illegal holdings relinquished,” Mr Morrison said.

“Foreign investment provides significant benefits for Australia but we must also ensure that such investment benefits all Australians, is in-line with our rules and is not contrary to our national interest.

“The 16 properties were purchased in Victoria, New South Wales, Queensland and Western Australia with prices ranging from approximately $200,000 to $2 million. The individuals involved come from a range of countries including the United Kingdom, Malaysia, China and Canada.

“The foreign investors either purchased established residential property without Foreign Investment Review Board approval, or had approval but their circumstances changed meaning they were breaking the rules.

“Since taking office in 2013, the Coalition Government has forced foreign nationals to divest a total of 46 properties. Under the previous Labor government, no foreign nationals were forced to divest illegally held Australian property.

“These divestments are a reminder that the Coalition Government’s increased compliance measures, which include transferring responsibility for residential real estate enforcement to the Australian Taxation Office (ATO), are working to ensure our foreign investment rules are being enforced.

“Since the Government’s transfer of responsibility to the ATO for compliance in May 2015, over 2,200 matters have been referred for investigation. Through information provided by the public, together with the ATO’s own enquiries, approximately 400 cases remain under active investigation.

“Since a new penalty regime was introduced from 1 December last year, 179 penalty notices have been issued, totaling over $900,000. Penalty notices have been issued to people who have failed to obtain FIRB approval before buying property as well as for breaching a condition of previously approved applications.

“Illegal real estate purchases by foreign citizens attract criminal penalties of up to $135,000 or three years’ imprisonment, or both for individuals; and up to $675,000 for companies. The new rules also allow capital gains made on illegal investments to be forfeited.

“In addition to divestments, a number of people came forward during the reduced penalty period who were not in breach and some who voluntarily sold their properties while the ATO was examining their case. There are at least 25 examples of foreign investors self-divesting in this way showing a change in behaviour towards more compliance with the rules and a strengthening of the program overall.

“While Australia welcomes foreign investment, foreign investors must comply with our laws,” Mr Morrison said.

The Business Does Foreign Property Investors

Interesting segment from the ABC looking at foreign investors, with a focus on Chinese investors. They highlight a number of factors which suggests momentum from this sector may slow.

Loan availability is tightening, and as supply of units in Melbourne and Sydney rise, prices may slide, meaning that some already to committed to purchase off the plan apartments may not be able to complete.

One agent says only 20% of purchasers physically visit the property, and as banks have introduced tough new rules, and the states, surcharges; the market may slow significantly.

That said, some private lenders are filling the mortgage gap though at higher rates and demand still remains.

The Rise of High Rise

The recent RBA Bulletin included a section on apartment construction in Australia. They conclude that apartments have become an increasingly important contributor to new dwelling construction over recent years and in 2015 accounted for more than one-third of all residential building approvals. The majority of recent apartment construction has been located in Sydney, Melbourne and Brisbane. Buyers come from all segments – owner occupiers, investors and foreign investors. Across these cities there have been differences in geographical concentration, the types of buyers purchasing the dwellings and supply-side factors such as planning frameworks. The increase in apartment construction has reflected a range of factors, including the nature of land supply constraints and affordability considerations, together with a desire to reside in close proximity to employment centres and amenities. Given that these factors are likely to persist, apartments are expected to continue to play an important role in providing new housing supply.

Initially, approvals for apartments increased in Melbourne in 2010, followed by Sydney, and then Brisbane more recently. Apartment approvals in Perth also increased in recent years, but from a relatively small base. The effect of this increase on the stock of apartments in each city has varied. Cumulative approvals since 2011 in Melbourne and Brisbane have added around one-third to the stock of apartments in those cities compared with an addition of around one-fifth of the 2011 stock for Sydney and Perth.

The location of activity within each of the cities has varied. This has been determined by a variety of factors, including proximity to employment centres and transport infrastructure, planning frameworks and the availability of suitable sites for apartment projects. In Sydney, approvals have been relatively spread out across the inner and middle suburbs – a large area ranging from Parramatta in the west to Chatswood in the north and Mascot in the south. In contrast, a relatively large share of apartment approvals in Melbourne has been in the city (which includes the CBD, Southbank and Docklands – an area of around 30 square kilometres), although construction activity in the middle-ring suburbs has picked up more recently. In Brisbane, activity has been concentrated in the city and in a few of the surrounding inner suburbs, as has been the case in Perth.

Alongside this strong construction activity, competition among developers for suitable sites for apartment projects has intensified and led to increases in site prices. Australian developers account for the majority of apartment projects, though foreign developers have become more active in acquiring sites and developing projects, mostly in Melbourne and Sydney. In addition to competing over the acquisition of suitable new sites and residential land, developers have also sought to purchase lower-grade office and industrial buildings for conversion into apartment projects, thereby supporting prices for these assets.

Turning to buyers, there are a variety of factors that have contributed to increased demand for new apartments from prospective owners and tenants. Employment opportunities and population growth are fundamental drivers of demand for new housing; sustained population growth in Australia’s largest cities has led to increased demand for all dwellings, including apartments. Population growth was strongest in Perth for much of the past decade, in part owing to migration associated with the mining investment boom. That growth has slowed over the past couple of years. In the eastern cities, land supply constraints have led to increased prices for blocks of land and detached houses. This is likely to have driven demand for apartments relative to other dwellings, as apartments use land more intensively than detached houses and are therefore relatively more affordable. A desire to reside close to CBD employment centres is also likely to have stimulated demand for apartments, as residents in increasingly populated cities value the convenience and reduced travel time associated with the proximity to amenities in these areas.

Three types of buyers can be distinguished – owner-occupiers, domestic investors and foreign buyers (‘non-residents’). Liaison with industry contacts suggests that, in recent years, the relative importance of these three groups has varied across different cities. Foreign buyers have played a relatively significant role in the inner city of Melbourne. In the inner suburbs of Brisbane, domestic investors (particularly from interstate) have underpinned demand, driven in part by the higher yields available relative to Sydney and Melbourne. In contrast, sales in Sydney have been more evenly spread across the three groups of buyers.

Whether buyers are owner-occupiers or investors can influence the composition of the net supply of housing. Purchases of new apartments by domestic investors are most likely to lead to an increase in the supply of rental properties. For owner-occupiers, the net effect will depend on the location and size of the existing property from which the purchaser is moving and whether there is a change in the rate of household formation. For example, if the owner-occupier is a first home buyer moving out of their parents’ home, total demand for housing increases alongside the increased supply of housing, whereas if they are moving from a rented property this will create a rental vacancy elsewhere.

Similarly, owner-occupiers who are downsizing will leave an established property that can possibly accommodate a larger household. The net impact from foreign buyers on housing demand will depend on the relative mix of those buyers who plan to occupy their dwelling (or leave it vacant) and those who plan to rent out their property. All foreign buyers, other than temporary residents, are generally restricted to purchasing newly constructed dwellings. The observations on foreign buyer activity in this article are sourced from liaison with property developers and other industry contacts.

Developers must record the residency of buyers to ensure that they do not exceed Australian banks’ caps on pre-sales to foreign buyers (if funded by an Australian lender). Non-residents and temporary residents must apply to purchase Australian property – the Foreign Investment Review Board records data on approvals for these purchases, though these data are limited and partial. Industry contacts have often reported that many foreign buyers, especially those who reside in East Asia, have additional motivations for buying apartments in Australia. It is commonly reported that foreign buyers purchase Australian property to diversify their wealth and intend to hold the property for a long period. Contacts also suggest that foreign buyers’ motivations can include the prospect of future migration, providing housing for children while they study in Australia, or acquiring holiday apartments. The interest from foreign buyers of property, particularly those from Asia, is not unique to Australia; such buyers are also active in the property markets in other countries, such as the United States, the United Kingdom, Canada and New Zealand. Other features that have been cited as attracting foreign buyers include the lower prices of apartments in Australia in recent years relative to major cities in some other countries (particularly following the depreciation of the Australian dollar), geographic proximity to Asia and a stable political and regulatory environment.

Apartments have driven the increase in new dwelling construction in Australia since 2010 and have provided an important contribution to economic growth and employment. The increase in apartment construction has reflected a range of factors, including land supply constraints, affordability considerations and a desire to reside in close proximity to established amenities and employment centres. This has delivered many new dwellings to the market, which has had an effect on housing prices and rents, with growth in these indicators slowing of late. The majority of recent activity has been located in areas with existing links to transport, infrastructure and services, particularly the inner suburbs of Sydney, Melbourne and Brisbane, and, to a lesser degree, Perth. The increase in apartment construction in these cities has been characterised by differences in the geographical concentration of activity, the proportional increase in the apartment stock, the types of buyers purchasing the new dwellings and the planning frameworks, which can affect the behaviour of developers and the supply response. Apartments are likely to continue to play an important role in providing new housing as land supply constraints motivate prospective home owners to purchase higher-density dwellings (which use land more intensively and are therefore less expensive relative to larger, lower-density houses), and as tenants and residents choose to live closer to employment centres and amenities for convenience.

Taxing Foreign Investors Harder

Excellent post from Cameron Kusher, CoreLogic RP Data, discussing the impact of the higher tax being imposed by several states on foreign investors in the context of state tax raising – they are highly dependent on stamp duty to support their coffers. He concludes that ultimately these changes may deter some foreign investment but these changes are not going to scare off all foreigners from investing in housing market. At the same time it will raise much needed revenue for these governments. If state governments are looking at taxes on property, they should move away from stamp duty to a more efficient land tax.

The state governments of New South Wales, Victoria and Queensland are all now charging additional tax on foreign investment in residential property. In New South Wales foreign buyers are being charged a 4% stamp duty surcharge from June 21. In Victoria, foreign buyers are charged a 7% tax and in Queensland foreign buyers are being charged a 3% surcharge. All three of these taxes are specifically targeted on transactions of property by foreign buyers.

Property (both residential and non-residential) is already the largest source of taxation revenue for state and local government. These additional charges to foreign investors in the three most populous states will probably raise additional revenue (as long as the higher cost of doing business doesn’t result in a downturn in demand from overseas buyers). For each government there is a benefit in these changes outside of additional revenue, foreigners don’t vote so politically it is likely to be a fairly popular decision. Especially in New South Wales and Victoria where housing affordability is a growing problem and there is a perception that foreign investors are bidding up prices and contributing to locking first home buyers out of the market.

In New South Wales, state and local governments collected $14.705 billion in property taxes over the 2014-15 financial year. Property tax revenue increased by 12.8% over the year and has increased by 80.5% over the decade to 2014-15. Property taxes accounted for 48.5% of total taxation revenue to New South Wales state and local government in 2014-15.

In Victoria, state and local governments collected $12.246 billion in property taxes over the 2014-15 financial year which accounted for 53.1% of total taxation revenue. Property tax revenue increased by 10.7% over the 2014-15 financial year to be 109.9% higher over the past decade.

Queensland property tax revenue increased by 12.6% over the 2014-15 financial year to be 80.7% higher over the decade. Over the 2014-15 financial year Queensland state and local governments collected $8.267 billion in property tax revenue which accounted for 51.5% of total state and local government tax revenue.

Over the decade to June 2015, property taxes have increased by 80.5% in New South Wales, 109.9% in Victoria and 80.7% in Queensland, over the same timeframe inflation has increased by 30.1% which is significantly lower than growth in property taxation.

Given the importance of property tax revenue to state and local governments it is no wonder that the three largest states have decided to increase taxes on foreign investment. These changes don’t impact on voters and they collect additional much needed revenue.

My concern is that it shows that none of these states have any intention of moving away from transactional taxes on property to more efficient land taxes. Keep in mind that in a typical year only around 5% to 7% of residential properties are transacting so you are only collecting stamp duty from a small proportion of the housing market that are deciding to move. When transactions and values slow or fall, stamp duty revenue is also susceptible to large declines.

In New South Wales and Victoria, governments are gaining substantial revenue from stamp duty as property values and transactions rise. In New South Wales, stamp duty collection rose 22.2% in 2014-15, in Victoria it rose by 18.9% and in Queensland it was 12.3% higher. Over the past decade, the total increase in stamp duty revenue has been recorded at: 125.1% in New South Wales, 116.8% in Victoria and 56.1% in Queensland.

Some of the commentary around the increases in tax have been around the fact that without foreign investors many of the new housing (particularly unit) projects would never have even commenced construction. To me, this is really the crux of the problem. As the resource investment boom has faded to some extent housing construction has helped to fill the void. If a projects viability is totally dependent on foreign demand, to me that suggests that it is not really a viable project. The reality is that the current home value growth phase has now been running for four years and new housing construction and unit construction in particular has hit record highs. Foreign investment has increased quite significantly over this time however, many of these purchasers are buying units which many locals wouldn’t purchase due to the size, location and price of these properties. Furthermore, anecdotally many of these properties don’t actually create additional housing because they are left empty and not made available for rent.

I believe that these additional charges will provide some deterrent for foreign buyers investing as the costs continue to add up with FIRB application fees and now these additional charges. Of course, while these changes may deter some investors other will just see it as a cost of doing business and it shouldn’t impact them too much if they are investing for the long-term. If fewer foreign investors results in some new housing projects not going ahead, that is not necessarily a problem either in light of the fact that housing supply has increased dramatically over recent years and will continue to do so over the coming years given the housing currently under construction. Finally if it means that certain developers decide to rotate their offering away from one catering to foreign buyers and towards one which is more palatable to a local market, I believe that is a good thing.

Ultimately these changes may deter some foreign investment but these changes are not going to scare off all foreigners from investing in housing market. At the same time it will raise much needed revenue for these governments. If state governments are looking at taxes on property I would once again call on them to look for a way to move away from stamp duty to a more efficient land tax.