Thanks but no thanks, keep your hands on your money and off our real estate. Both the State and Federal Government have introduced budget measures in the past month that will deter foreign investors in the property market.
There will be talk about the measures raising new taxation revenue to fund affordable housing. The reality is these respective Government measures, in combination, will divert foreign property investors away from NSW. The other States are considering or have introduced similar measures too.
In short, the Federal Government has introduced a ghost tax on properties purchased by foreign investors that are left vacant. The Government is attacking this strategy because vacant properties don’t add to the supply pool, at a time where extra supply is desperately required. Admittedly this is going to be difficult to police. It seems to be the weakest and most unmanageable of the new measures targeting foreign investors.
The ghost tax or vacant property tax seems to have been borrowed from the Canadian playbook. Nearly identical measures have been introduced there in the past 18 months.
Tackling foreign investors
Foreign investors are only permitted to purchase brand new dwellings in Australia. This created a price bubble in brand new dwellings as demand from foreign investors pushed prices above the broader market. The Federal Government has now introduced a measure that insists foreign investors can’t purchase more than half of overall new developments. The days of developers building apartment blocks exclusively for the offshore market are over.
These are all good measures that would dampen but not halt foreign investors. To ensure there was no chance foreign funds would flow over the top of the Federal Governments measures, the State Government raised the dam wall.
In NSW, land tax has been raised from 0.75% to 2% while stamp duty has also doubled from 4% to 8% for foreign investors.
No one measure in isolation will change the course of foreign funds. Collectively, the measures essentially slam the door in the face of foreign property investors.
The debate will rage as to whether the changes will have positive or negative implications for the State, country and the property market. First home buyers will surely welcome less competition in the affordable end of the apartment market.
In the commentary, people have taken opposite sides – some say the measures will ultimately deter development, therefore exacerbating the undersupply. Given the population growth in Sydney, any pullback in new dwelling supply will soon create upward pressure on prices. A pullback in residential construction and developments that inadvertently pushes property prices higher would be the Government’s worst nightmare.
Others are saying that this will cause prices to fall as foreign investors bring vital demand (and money) into the residential sector.
From a global perspective, Canada is the most comparable market to Australia. It is a commodity based currency and economy with low interest rates, a world-class lifestyle and healthy employment. The Canadians also struggled with foreign investors pushing the price of their real estate to all-time highs – making housing largely unaffordable for local residents, mainly first home buyers.
The Canadian Government successfully introduced measures to stop the inflow of funds from abroad – the result being decreased property prices in Vancouver and Toronto.
In The Australian, Robert Gottliebsen wrote, “Like Melbourne and Sydney, a series of clamps and higher taxes have been imposed on overseas investors in Vancouver.
Accordingly, Vancouver has seen an easing of prices but, more importantly, volumes have been slashed because sellers can’t move their stock. In April the volume of detached Vancouver houses sold fell a staggering 50 per cent”.
Vancouver slapped all foreign investors with a 15% tax which quickly and decisively killed demand.
Time will reveal all
How these recent Government changes impact on our local market will only be determined in due course. Aside from foreign buyers, the property market has been hit with a series of measures to slow price growth.
In the past 12 months, Sydney apartments have begun to lag houses in terms of price growth. However, well-located luxury apartments will appeal to baby boomers looking to downsize while a generation of first home buyers will absorb affordable apartment stock.
Therefore, it still takes a brave person to call the end of the boom given interest rates are at record lows and employment is high.