The recent budget contained few surprises, including the fact that additional changes, let’s call them disincentives, were introduced for foreign buyers of residential property. These measures join a raft of levies and taxes already introduced by state governments.
The budget took aim at foreign investors and the big five banks, with both attracting new taxes and in either case you would be hard-pressed to find much sympathy among the general population. The targeting of foreign residential property investors is part of a worldwide trend. Before looking at some of the international trends, let’s just step back and remind ourselves about the nature of real estate, to establish some perspective:
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” Franklin D. Roosevelt, US President.
“Buy land, they’re not making it anymore.” Mark Twain, writer and humorist.
These quotes make two valid and obvious points. Real estate is a great investment and supply is limited. Therefore, it will always be in demand, and in a world where capital and trade is generally or is currently liberal, property will always be in demand no matter where it’s located.
What’s also clear is that where there is ability to buy offshore, buyers will do so. Particularly when the properties are in countries with stable governments and economies, despite any additional taxes they might be required pay.
Is Foreign Ownership (Investment) a Problem?
Even before the election of Donald Trump it seems that the idea of ‘free-trade’ was starting to fall out of favour. Property ownership has become a hot-button issue and there’s mounting pressure on government’s, including our own, to restrict or at least be seen to discourage foreigners from buying local residential property. However, is there an actual issue here, and why just pick this one class of investment or asset?
For some countries, policies in this area become a headache when coupled with cries that affordability is being directly impacted by this international trend, although there is little consensus that foreign investment is a key factor driving the lack of affordability. The argument is that the direct links have not been proven. Its more an emotional cry, as it has always been, that we are somehow ‘selling the farm’ to our future peril. Just like many other jurisdictions, locally both State and Federal Governments have responded with new restrictions and taxes.
We are not alone and many of our immediate neighbours already impose hefty additional taxes on foreign buyers. Reflecting similar policies in Australia, foreign buyers in Hong Kong and Singapore need to absorb extra taxes and levies when buying some classes of residential property.
Here are some comparison stamp duty figures that are based upon a AUD$1m investment property: [Assumed Exchange Rates: 5.83HKD, 1.06SGD]
Australia Hong Kong Singapore
Citizen: $40,490 $150,000 $94,905
Foreigner: $80,490 $300,000 $174,905
The following infographic demonstrates international policies:
Just why foreign buyers are willing to pay extra costs and work within varied restrictions reveals a mixed bag of factors. Some are economic but many are lifestyle driven. Often demand is driven by so called ‘haven investors’ many of whom have the wealth to disregard affordability measures. With cash not a problem, these buyers appear attracted to supply-constrained areas where values might be expected to rise.
There is clear evidence however that many buyers are driven by lifestyle considerations, something as basic as blue skies and fresh-air.
Local Measures to Contain Foreign Buyers
State Governments in NSW, Queensland and Victoria are targeting off-shore property buyers by extracting a range of additional fees, charges and stamp duties along with a ‘vacancy-tax’ if properties are not leased or owner-occupied. Foreign and temporary tax residents will be denied access to the CGT main residence exemption on their Australian property. Foreign resident CGT withholding rate will be increased from 10% to 12.5% and will apply to Australian real property and related interests valued at $750,000 or more (formally $2,000,000). The extend of this reduction is a major shift in policy and may eventually apply to all similar transactions.
In combination, these measures may well dampen off-shore demand but not, as suggested improve housing affordability. Given that 28% of the Australian population was born overseas and that we have always relied upon immigration for our growth and economic prosperity the measures being introduced look somewhat opportunistic and they may well backfire.
Among the 28% of people born overseas the top five countries are: The UK, New Zealand, China, India and Vietnam, make-up the top 5. Naturally these regions have interest in our local property markets. Only under some circumstances will buyers from NZ be exempt from the new charges.
These Measures Will Do Little to Make Homes More Affordable
Looking at the raft of charges there’s frequently the suggestion that these extra charges will somehow improve affordability by possibly taking the number of foreign buyers out of the market, and by doing this, make homes more affordable. This looks like narrowly focused discrimination in what should be a free-market for a country that relies upon strong trading relationships and should encourage all forms of investment.
Looking at the individual measures, in NSW overseas buyers will be charged higher stamp duty fees and land taxes. These buyers must pay an extra 4% stamp duty (now possibly increasing to 7%) and pay an additional 0.75% land tax from January 1, 2017. The additional land tax changes will also apply to all existing foreign owners of residential real estate and will be ongoing with the added revenue to boost local services.
In Victoria from July 1 overseas buyers are also facing new charges with an extra 1.5 per cent on land tax.
Queensland has also announced that foreigners will also have to pay an extra 3% tax on real estate purchases. While in South Australia no new charges are being levied, which might just be a very clever move as SA seeks to attract more off-shore buyers into the local economy.
Each of the NSW, Vic and QLD state governments site high median house prices as the logic behind these new policies, which in part appears to suggest that off-shore buyers have ‘over-heated’ the market. However, markets are complex and no single factor should be over-stressed.
By possibly taking some offshore buyers out of the market, the resulting reduction in demand could be critical in getting new projects off the ground, making finance harder to secure and this could in the longer-term reduce and not increase supply. The move may well diminish construction activity and impact economic activity and the vital flow-on impact to a wide cross section of consumption and employment could be a negative. In the eyes of most state governments property transactions simply look like an easy source of cash. There is almost no evidence that this sort of tax imposition will impact (reduce) prices.
The housing market is complex, and there may be a case for some direct incentive (beyond the changes in the last Federal budget) to help first time buyers and use some imagination to help this group, and more property related taxes without that help, simply invites the label of ‘tax grab’.
Offshore buyers look an easy target, but they make an important economic contribution that should not be side-lined. The tax take from property buyers both local and offshore buyers still looks to be very excessive. If any of these measures will increase supply and the supply of affordable housing remains in doubt and it’s the supply side where the problem, still lies.