The last time the world was hit by a financial crisis, Australia was saved from the worst aspects of the recession.
The growing Chinese economy plus a healthy government stimulus package saw export demand for our coal and iron ore balance the impact of the GFC on our stock market and on employment. We didn’t even go into recession.
Another important factor was the money that Chinese investors poured into the new apartment building sector. This kept thousands of construction workers in employment along with the associated architects, planners, landscape designers, structural and geotechnical engineers etc. Further, this investment generated stamp duty which was critical in keeping the state governments afloat.
But since that time, Australian politicians have done everything they can to lock out foreign investment in property.
All foreign investment in property is now subject to review by the Foreign Investment Review Board (FIRB) and this typically takes months to process.
Foreign buyers who purchase residential property in NSW must pay an additional 8% surcharge purchaser duty on top of any stamp duty. Further, if you are a foreign resident required to pay a 2% surcharge each year on the unimproved value of the land (land tax), on top of any land tax that would ordinarily apply. This tax surcharge is paid on the taxable value of all residential land with some minor exemptions.
Governments across Australia have worked together to keep the economy working while dealing with the COVID-19 crisis. But one thing they have not seriously considered is relaxing some of the restrictions on foreign investment into Australian property. Why???
There was some fear around 2012/13 that Chinese investors were constructing apartments then leaving them empty, but this was short-lived, and the vast majority of all apartments built during that period are now occupied.
Some critics pointed to the quality of architecture or the changing nature of some of our suburbs to put pressure on politicians to introduce these anti-foreign property investment taxes. Most of those aesthetic based complaints were during the construction of the buildings, when scaffolding is up and there is dust everywhere and long before the facades are installed, and landscaping completed.
Today, we face a dual crisis. Firstly, there is an under-supply of residential houses and apartments up and down the east coast of Australia. Secondly, the COVID recession has not even started to bite the construction industry yet – but the forward order book is looking very lean indeed. The impact of this recession will hit the construction sector just as the JobKeeper program and the JobSeeker support winds up.
So, I ask again, why do we still have these restrictions on foreign investment into property in the capital cities of Australia?
One day, hopefully soon, overseas travel and immigration will be opened up. The vast majority of immigrants bring skills and savings into our economy. Far from taking jobs, they create them – way above and beyond their own number.
Immigration is the only thing we have to help Australia through the coming period as the post WWII baby boomer generation enters retirement, stops paying taxes and consumes increasing expensive health care and aged care services. We need immigrants to bolster the tax-payer to non-tax-payer ratio. Otherwise, there won’t be enough of us working and paying taxes to pay for the demands on government funded health care system to keep our economy above water. Most baby boomers do not have large Superannuation balances as it was not made compulsory till the 1990s.
Bust immigration aside, these anti foreign investment taxes are now working against the interests of our economy. Banks and Non-Bank-Financial-Institutions have essentially stopped lending money to developers. Off the plan sales have dropped to near record lows. Unemployment is rising and is likely to continue to rise.
Punitive taxes on foreign investment go way beyond the Chinese (who as noted above, essentially saved the property market and construction industry in the post GFC period). These taxes hit institutional funds based in the USA, Canada, the UK, Singapore or Hong Kong. Why would we do that?
The idea that foreign investment into strategic assets (our ports, farmland, defence assets, telecommunications, media assets etc) should be reviewed by FIRB is fair enough. But setting the threshold at zero and applying it to residential apartments or even houses is nonsensical.
Those able to make such investments are the very people we want to encourage to come to Australia. In the meantime, their investments create housing for people to buy or rent. I iterate, we have a housing supply shortage in Sydney, and this is driving prices beyond the reach of prospective new-home owners.
Some intellectual pea-brains have accused developers of profiteering by holding onto land and waiting for prices to rise before developing new homes. News-flash: the only thing that makes this possible is the lack of competition caused by government planning agencies restricting the supply of developable land. No developer will hold property if another is developing next door and making a return. They would risk losing their market and missing out altogether.
Right now, Australia needs all the employment generating investment we can muster. Further, is our major capital cities, we need housing supply to put downward pressure on housing prices. Lastly, we need funding to make up for tight prudential constraints that have been applied by APRA and the major banks. In short, we need to remove the special provisions that make foreign investment into Australian property almost impossible.
The truth is, when Pauline Hanson asks for an explanation of xenophobia, she need go no further than to look at the above.
By Tom Forrest, CEO, Urban Taskforce