A Little Less Love for Foreign Investors
In “Why the Chinese Love Australian Real Estate,” I said that unless something cataclysmic happens, off shore investment into our property market could be here to stay. While there’s nothing cataclysmic to report, the door to foreign investors just became a little less open.
Strict new rules for offshore property buyers have now gone into effect. Even local developers, buyer’s advocates and agents will face greater scrutiny. For those who are caught breaking the laws, hefty new penalties apply.
For months, public backlash has been mounting. Many have blamed cashed up Chinese investors for soaring real estate prices in Melbourne and Sydney. Foreigners seemed to be finding loopholes in foreign investment laws, and some were downright ignoring them. Now the government is tightening up.
In May 2015, the Foreign Investment Review Board (FIRB) put overseas investors on notice. Anyone who had illegally purchased an Australian home was offered a seven-month grace period. If they were willing to come clean and confess their sins, they would be protected from criminal prosecution. Their only requirement would be to sell the property within 12 months and turn any capital gains over to the government.
As of December 1st, the gloves have come off.
Now the Australian Taxation Office (ATO) has taken over enforcement from the FIRB and employed 50 scary compliance officers to investigate suspicious cases. No doubt, there will be plenty in the Australian public who will be quick to rat out possible perpetrators.
The Laws
Non-resident foreigners are prohibited from buying established properties. They can buy brand new properties, but only after being granted permission from the FIRB. Temporary residents can buy established properties, but they too must first gain approval. These are the laws that have been in force for some time.
The New Fees
The New FeesAs of this week, there are substantial new application fees that must be paid upon request for approval. The fee starts at $5,000 for properties under $1 million, and then it goes up to $10,000 for properties over $1 million.
For properties over $2 million, the fee is $20,000, with an additional $10,000 added for each million thereafter. This fee still doesn’t guarantee approval, but as long as the basic requirements are met, it’s pretty much a rubber stamp.
The New Penalties
There’s always been a fine for those who purchase a property without proper permission, but that penalty has just increased from a maximum of $90,000 to $135,000, plus a criminal offense charge and possible jail time. For companies, the maximum is now $675,000. The same penalties also apply to temporary residents who purchase property without approval.
If you’re a real estate professional and you help a foreign investor breach the law, watch out. Individuals could face a fine of up to $45,000 per occurrence, while companies would have to pay as much as $225,000.
Property developers who market their properties overseas are also now required to market them in Australia. Those who market exclusively in offshore markets could be fined $135,000, plus face up to three years in prison.
What This Means for Our Property Market
Tighter regulations always tend to put a damper on property prices, but the extent to which these new laws will slow down the flow of Yuan into Australia will take a few months to be seen.
I’d venture to guess that the new application fees will not be a significant deterrent, as many Chinese still fear further devaluation of their currency and will be looking for safe haven assets overseas. The fees will be seen as a small price to pay for peace of mind.
While tougher new penalties for breaking the laws may discourage investors from skirting the red tape, they will likely have little impact on their determination. Many Chinese continue to seek the lifestyle benefits of owning real estate in Australia. It just means a purchase that would have taken one month previously, will now take three months or even longer.
As long as the Chinese still have inflated assets to liquidate in China, and they can get Yuan out of the country, the buying should continue. If the Yuan is devalued massively or if shares and real estate take a greater hit in China, the story could be different.
Our politicians have a balancing act to maintain. While they want to appear to be doing something to prevent offshore investors from inflating our real estate market, they also know that our economy desperately needs the ongoing injections of capital.
What Do You Think?
Will these new regulations have a significant impact on our property market? Share your thoughts below.
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Hi Jason,
Had to have a chuckle at these words :-
“These are the laws that have been in force for some time.”
As things used to be, “in force” just didn’t seem to apply. The laws were “in place” – just that the FIRB didn’t seem to notice !!
Now, from your words, “in force” might finally be appropriate.
Will these changes stem the tide? Like you, I don’t see that – maybe slow a little, but Aus is still a great place to be, and is attractive to MANY nationalities. It is still a stable Western democracy with lots to recommend it to others in the world. That will ensure that there will always be those who aspire to be here, to have a ‘pied a terre’ in one of the major Capitals, or simply to safeguard their wealth by holding it in Real Estate.
Not likely to change any time soon according to this lil black duck !! ;)
Benny
Good points Benny. Someone once told me a law is only a law if there’s a consequence for breaking it.
“Temporary residents can buy established properties, but they too must first gain approval.” Is this just for a PPOR or could it be for an IP?
Interesting how a lot of people blame the Chinese investors for pushing up prices even though they only make up 2% of purchases.
PPOR only. According to ATO website, “If you are a temporary resident you can buy an established dwelling if you use it as your residence in Australia and get approval from the Foreign Investment Review Board.”
Keep in mind that 2% stat is based only on FIRB approval figures. It does not count the “under the radar” purchases. NAB’s research has estimated 16 percent of the total demand in new housing markets, and nine percent in the established housing market, can be attributed to foreign demand. That’s obviously not all Chinese, but I’d say it’s significantly higher than 2%.
Will be interesting to see if this changes with these new fees and penalties.
Further to Jason’s comments on a significantly more % of Chinese investors making up the market. I have seen a lot of properties in the outer East of Melbourne effected by suburbs closer to the city being bought out by foreign investors and as a result the ‘locals’ are having to spend more in other surrounding suburbs.
Will be very interesting to see the suburb by suburb median prices for the Dec quarter as I feel another large reason prices went so high was lack of stock. With more on the market in Spring a slight correction will be seen in most areas.