Is Foreign Investment Such a Bad Thing?
We are debating (yet again) the impact of offshore investment into our domestic residential property market, both private buyers and developers. This has helped fuel government policies that are centred on additional taxes and restrictive policies.
Recent state and federal budgets have contained a range of new disincentives, aimed at foreign buyers of residential property.
Despite these new charges and levies foreign buyers 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. But it does raise the question: is foreign investment such a bad thing?
To help answer this question let’s just step back and remind ourselves about the nature of real estate and then consider the positive benefits.
Real estate is a great investment and supply is limited. Therefore, it will always be popular, and in a world where capital and trade is generally liberal, property will always be in demand no matter where it’s located, and that includes Australia.
What’s also clear is that where there is the ability to buy offshore in free/open markets, buyers will do so. Particularly when the properties are in countries with stable governments and economies, and that’s despite any additional taxes they might have to pay. We also need to appreciate the appeal of very basic factors such as access to clean air and sunshine, of which we have plenty.
Is Foreign Ownership (Investment) a Problem?
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, although there is little consensus that foreign investment is a key factor driving the lack of affordability, although any 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.
What Drives Demand
Why foreign buyers are willing to pay extra costs and work within varied restrictions reveals a mixed bag of factors driving demand.
Political stability and our strong property (title) laws are also positives. Because of the current restrictions most offshore investment is naturally focused on new apartments, and new controls in the area look poor policy.
Often demand is more 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.
These same buyers also usually invest heavily in value-added services and goods associated with their purchase, this flow on affect is not easy to measure but clearly every new home must be furnished and maintained.
One key point is that offshore buyers are not coming here to play cricket in the streets, they are anxious to engage in society and they take a long-term and very considered view of what and where they buy.
Local Measures to Contain Foreign Buyers
Various Governments are targeting off-shore property buyers by limiting the percentage of off-the-plan sales, extracting a range of additional fees, increased capital gains taxes and stamp duties along with a proposed ‘vacancy-tax’ if properties are not leased or owner-occupied.
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. Naturally these regions have interest in our local property markets. Only under some circumstances will buyers from NZ be exempt from the 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 ‘competing’ 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.
Governments site high median house prices as the logic behind the new policies, which in part appears to suggest that off-shore buyers have ‘over-heated’ the market.
However, property 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.
To say that foreign buyers are pushing up prices is too simplistic, price increases because of a combination of factors. Above all its tied to the lack of suitable supply and the very poor delivery of infrastructure to enable a free flow of new stock.
The supply side is also now being influenced by the direct development involvement of foreign investors into our markets, and thus boost supply; it’s a good example of why offshore direct investment into residential property is a positive trend.
Current restrictive moves may well diminish new construction and impact economic activity and the vital flow-on impact to a wide cross section of consumption and employment will 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 the extra tax impositions will impact (reduce) prices, and simply targeting foreign buyers 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.
If any of the measures currently being taken will increase supply, including affordable housing remains in doubt and it’s the supply side where the problem still lies. Foreign investment being tagged as the boggy-men in the market is negative and counter-productive.
Helping to Sustain the Local Economy
Like all investors, foreign investors also focus on the potential of capital gains and so they look for apartments that have strong appeal to the local market, after all as it’s often said, you can’t exactly pack up an apartment and ship it off in your luggage on the next Qantas flight.
Suggesting that offshore buyers are a significant cause of higher prices or tight markets and reduced affordability is reckless and thoughtless. They are looking for a full cultural involvement with Australia and that extends beyond the apartments themselves.
Foreign investors go on to become part of the wider community, they buy furniture, cars and services and so that filters into the economy, helping to sustain activity and boosting supply via direct and sizeable development investment.