Thursday, April 22, 2010

We need to stop foreigners buying our houses. I never thought I would say that.

Alan Mitchell makes the case well in Wednesday's AFR (extracts below).

When a massive inflow of capital chases something whose supply is fairly fixed, prices soar.

That's what happened when

. Tax changes pushed hundred of thousands of mums and dads into buying rental properties to negatively gear;

. Explosively growing super funds bid up the price of Australian shares,

. And when post-GFC capital honed in on Australian houses.

Tim Colebatch reports today on the beginnings of action to address the problem:

FEDERAL and state governments have commissioned a working party of officials to hold a no-stone-unturned inquiry into all factors contributing to record house prices, as Labor senses the issue is becoming a political danger.

The inquiry, to deliver its first report within weeks, will examine sensitive areas such as tax breaks for negative gearing, land banking by developers, and whether grants to first home buyers push up house prices. Sources said the working party, comprising federal and state Treasury officials, had been operating for several months, looking at the factors adding to housing demand, and those inhibiting supply. Almost all key factors are on its agenda.

The two exceptions are the record levels of migration and rising real estate investment by foreigners and temporary residents.

Assistant Treasurer Nick Sherry today will hold a telephone conference with real estate agents over reports that up to 30 per cent of homes sold in Melbourne's inner-eastern suburbs are being bought by Asian buyers. The 13-point agenda for the working party starts from the one thing all agree on: that high house prices are the result of too many buyers chasing too few properties.

Now here's Mitchell...

House prices are rising strongly even though new lending for housing is falling, and cashed-up foreign investors are prime suspects. The government should put foreign investment in residential real estate under closer regulation of the Foreign Investment Review Board, and the sooner the better.

Foreign investment and housing affordability are a politically explosive combination, and a godsend in an election year for politicians who don't mind engaging in a little outer-suburban racism.

The government will end up increasing the role of the FIRB anyway. If it moves quickly it can avoid an ugly debate.

Australia is now one of the world's few prosperous developed economies, which makes it a magnet for foreign investors and migrants.

The property market, where the supply of new housing is constrained by the states' poor urban planning, is a natural hot spot.

Unfortunately, we are a long way from the reform of urban planning that would make a serious supply-side difference to the price of housing in Australia's major cities. The problem must therefore be managed from the demand side.

Closer involvement by the FIRB would reassure the public that the activities of foreign investors were under proper supervision.

House prices and the highly charged atmosphere of the property market are Australia's biggest economic problem.

The greatest fear is that the surge in property prices will give birth to a speculative bubble in which prices become detached from underlying market fundamentals. But even without going to that extreme, the strength of property prices is complicating the task of cooling the housing market.

The Reserve Bank's action has seen mortgage rates restored to about their long-term average level, and this has reduced the local demand for housing loans. But Australia's monetary policy has less effect on the behaviour of foreign investors who borrow from their own banks at much lower interest rates.

Higher Australian interest rates do strengthen the exchange rate, which makes Australian property more expensive for foreigners. But that does not necessarily put them off. With interest rates expected to rise further in the coming year, foreign investors are just as likely to decide to jump into the Australian market before the dollar becomes even stronger.

Under the current FIRB rules, purchases of new residential properties are "normally approved" and there is no limit on the number that can be sold to foreigners. There is, however, a ban on purchasing second-hand dwellings for investment purposes.

Purchasers must have temporary visas, although they are no longer required to dispose of the property on leaving the country. And homes purchased for overseas students are no longer subject to a cap of $300,000.

In the current economic environment there is probably a case for imposing discretionary global limits on residential investment. For that, the FIRB could draw on the expertise of the Treasury, which is acutely aware of the need to keep the property market on track.

The involvement of foreign investors slightly changes the nature of the property price problem.

Property price booms do their greatest damage when they collapse, ruining highly geared investors and, sometimes, financial institutions in the process. Ruination of foreigners and their financial institutions does not pose the same threat to the Australian economy.

Apart from government regulation, the biggest cause of Australia's shortage of rental properties is the low rental yield.

Gross rental yields are now about 4.5 per cent in Sydney and 3.9 per cent in Melbourne. According to the experts, yields probably need to rise by another 2 per cent.

The best way to attract investment into the rental market is for rents to rise relative to prices.

This will happen, although the structure of the residential accommodation industry probably will make the adjustment a slow process.

A speculative boom in rental property also can boost the supply of rental accommodation in the short term, but is less reliable and potentially more disruptive.

For a start, it will send prices up across the housing market, making the purchase of homes less affordable for other Australian residents.

That is the immediate hot-button political issue.

Any subsequent decline of prices from unsustainable levels also affects Australian investors and home owners.

Related Posts

. You should have bought that Melbourne house a year ago

. Reserve Bank to public: Don't complain about the house prices you're pushing up


little aussie auditor said...

There is no valid reason for temporary visa holders to buy a foreign property, none that I can see anyway.

It is simply gross antagonistic competition that local buyers can do without. Why is it allowed?

For anyone wishing to launder money however, it must be as a dream come true.

mOOm said...

I have mixed feelings on this. On the one hand I don't want to limit foreign investor. I'm an investor in foreign stocks, bonds, and property via investment funds. OTOH I would like Australian house prices to come down to reasonable real levels.

Anonymous said...

As soon as property prices surpassed the all time high the FIRB laws should have been wound back. The allowance of Temp Residents to buy property of ANY Value must be reversed. If we are already in a very large land price bubble, does it make sense to add another new element to the demand for land? Dud Laws by dud leaders.

Anonymous said...

Thanks for the article Peter. Housing affordability is becoming a very big problem. We need the government to take action to reduce the problem.

"The two exceptions are the record levels of migration and rising real estate investment by foreigners and temporary residents."

Is that right? So the government is not going to review foreign investment? How outrageous! Can the media please make those politicians with all their perks and luxuries explain themselves?

Anonymous said...

This is what happens when your economy is based on speculation rather than productive investment. The move to this started a long time ago and houses haven't just started to become unaffordable. Is it too late for a soft landing on house prices?

carbonsink said...

Tanner on negative gearing last night:

The key reason why governments of both persuasions have not interfered with negative gearing is of course that that any dramatic change in the overall investment framework could lead to a stampede of people out of property, which could lead therefore to dramatic drops in prices which of course you’re seeing in other economies around the world and you see the economic devastation that flows from that, so there's a lots of issues involved here.

There it is in black and white. Tanner is saying house prices are supported by government tax policy. Why then is the entire Australian economic commentariat telling us that house prices cannot fall in Australia due to a chronic under supply?

I think Chris Joye needs to have a chat to Lindsay and correct him on a few "facts".

carbonsink said...

A question for Mr Tanner: How can a housing meltdown in Australia be triggered by the removal of a tax break when we have a chronic under supply of housing?

FWIW, I really like Tanner. IMHO he's far and away the best minister in the government. His weakness is that he can sometimes be too honest.

Pollies with portfolios said...

Yes, speculation versus productivity.

In 2001, the then Treasurer, said:
"Work for a living and we'll tax you at close to 50 cents in the dollar; speculate and we'll only take 25 cents. Not only that but, as a special deal - while stocks last - we'll pay half your speculating costs."

'How tax system egged on property speculation’:

The housing bubble was so obvious by 2002 that surprisingly the Libs initiated the 'First Home Ownership Inquiry' - the result:

The Libs wore none of it, especially the recommendation:

"The Australian Government should, as soon as practicable, establish a review of those aspects of the personal income tax regime . . The focus of the review should be on the Capital Gains Tax provisions.

. . also assess ‘second best’ options for addressing distortions . . including: restrictions on negative gearing and changes to the capital works deduction provisions for buildings."

The response from the Treasurer was predictable:

"the Government considers that it would be inappropriate to change existing arrangements relating to capital gains or negative gearing”

Six years on and little has changed.

Last night (22/04/10) on Lateline the Finance Minister had this to say: “key reason why governments of both persuasions have not interfered with negative gearing is of course that that any dramatic change in the overall investment framework could lead to a stampede of people out of property, which could lead therefore to dramatic drops in prices”

Short story: neither Libs nor Labor have any interest in making decisions that will directly effect their own property portfolios in a negative fashion. Rest of community can go jump. If Australians don't like it, just import temporary visa holders who will.

Additional resource:
A good house is hard to find: Housing affordability in Australia 2008

Anonymous said...

How can you seriously write a post about this without any data whatsoever?
If a serious issue, one would think the number of properties purchased by foreigners is relevant, put into the context of the size of the market.
Until then, this is hardly journalism.

The Weatherman said...

I wonder why we relaxed the rules relating to foreign investors buying up Aus residential property. In order to keep the prices up perhaps? As long as we remain married to the view - pushed by the media and assorted spruikers - that rocketing inflation in the residential property sector is somehow a good thing, I think we can rely on the Govt. to do whatever they can to push prices up. Until attitudes change, why should they change?

carbonsink said...

Of course foreign investment rules were relaxed to defend house prices.

Didn't you notice the barrage of policy thrown at the property and construction sector at the onset of the GFC? Let me see: Interest rates slashed, first home owners boost, state govt stamp duty concessions, schools building program ... and foreign investment rules relaxed. All at the same time.

No wonder Australians think they can't lose on real estate, when they know governments of all political flavours will defend house prices at all costs. Moral hazard anyone?

FIRB checks on residential sales said...

Hi anon4, yes FIRB rule changes are a bit tricky for someone like yourself who "would think the number of properties purchased by foreigners" would be relevant to any argument.

For designers of FIRB rule changes (open slather buy-up of residential property by anyone waving dollars and a temporary visa) – it means nothing. They have simply decided not to bother to keep track of sales. Out of sight, out of mind, apparently.

Temporary visa holders in Aus at June 2009 = 918,647

Little wonder the govt does not want to have any idea what is happening.

Numbers are huge as would be potential market distortion.

Anonymous said...

Under the "no limit, no reporting" rule for Temporary Residents. There is talk of foreign syndicates pooling funds to buy a property to Land Bank.

Kevin Rudd must immediately reverse the removal of monetary limit on property purchased by TR's. Else, the land banking will continue to price aussies out of their own cities.

And as for the ones that have already been purchased, upping the holding costs (i.e. land/wealth taxes) is the only way we'll ever get that land back.

FIRB watchdog back on the job :) said...

Thanks Peter for providing a venue that assisted in highlighting the short-sighted FIRB rule change folly.

Latest rule changes (with exception of $300,000 limit) will not stop the great sell-off of sovereign assets but will/should slow it somewhat and will ultimately make it auditable.

Playing the community off against cashed-up temporary visa holders as a version of monopoly for neo-liberal property speculation is on its last legs, I hope.

Next step in push back against property speculation taking over the economy would be to replace current unimproved land tax system with land value tax, as suggested by:


carbonsink said...

Govt has capitulated on FIRB rules

No inquiry, no data, no nothing. Must be entirely political or they have some pretty damning data they're not telling us about.

Certainly this move is a lot easier politically than doing something about negative gearing, CGT concession, depreciation allowances, and all the other rorts abused by property investors. Much easier to target foreign investors than over-leveraged Mum & Dad investors.

Jan said...

"The two exceptions are the record levels of migration and rising real estate investment by foreigners and temporary residents."

The level of asian migration and other migration is at such a level this is impacting on quality of life for Australians.
I am the only caucasion left in my street.. and its expensive. 22 million is the max sustainable population in AUstralia.
The universities are asian filled.... every asian woman who has worked for me (cash in hand of course) gets the dole as does her husband....
Our country cant support them all. Time to stop allimmigration and let us all settle down.

Anonymous said...

Jan said.....
every asian woman who has worked for me (cash in hand of course) gets the dole as does her husband....

So you are just as bad supporting this centerlink rort by paying these people cash in hand, or don't you realise this? What you are doing is also illegal. It takes two to tango redneck.
BTW, being a "caucasion" (caucasian actually) you are also an immigrant to this country.

derrida derider said...

"The universities are asian filled ..." - yes, and the unis charge each of those non-residents an arm and a leg and use the money use to subsidise places for aussie kids. We're actually ripping these people off something fierce in order to avoid paying taxes to educate our own kids.

As for the bit about "they all get the dole" that is a particularly pernicious lie. For a start, you have to have lived 2 years in the country to get the dole. For a second, the dole is very, very low - they'd earn far more in a single day's work than in a week on the dole (especially if a crook like Jan pays them cash in hand). And for a third it is very hard these days to escape Centrelink's compliance and data matching regime.

It's not the redneck attitude that bugs me so much, it's how ready people are to believe myths that suit them.

carbonsink said...

McCrann says RBA will hike in May

And we all know Terry has the inside knowledge.

Lets not muck about Glenn. Go 50bps in May to show the housing market you mean business.

Post a Comment