Overseas property investors will be hit with extra fees of at least $5000 when purchasing properties in Australia, if plans flagged yesterday by the federal government go ahead.
Prime Minster Tony Abbott and Treasurer Joe Hockey announced the new foreign tariffs at a press conference in Sydney yesterday, off the back of a remarkable auction weekend in the city.
Hockey revealed plans for properties purchased under $1 million to attract a $5000 application fee, while those over $1 million would be hit with an extra $10,000 for every extra million dollars in the purchase price.
The extra fees are expected to raise $200 million a year for the government, which Abbott and Hockey said would go towards funding greater scrutiny of the Foreign Investment Review Board (FIRB).
There will also be a new registry set up so the government can keep tabs on how many foreign residential and agricultural property owners are in Australia and an increase to the amount of penalties slapped on foreigners caught illegally purchasing real estate, which would be up to 25% of the value of the property.
“The idea is not to deter foreign investment, the idea is to ensure that the rules are enforced,” Abbott told reporters, according to Fairfax.
The Australian property market has undoubtedly been given extra buoyancy in recent years thanks to increased demand from overseas buyers. However, many market commenters say foreign cash is not the driving factor of Australian property prices.
SQM Research’s Louis Christopher told SmartCompany the reason the Sydney market has seen such growth in recent months is a combination of low interest rates, little to no exposure to the mining downturn, a recovering investment sector, a low Aussie dollar and expanding population growth, rather than an influx of foreign buyers.
“When we look at FIRM evidence – and the latest is from 2013 as we wait on the 2014 figures to be release – the figures actually do not show any significant increase in the overall purchase of real estate [by foreign investors],” says Christopher.
He says while some investors will certainly be “turned off” by the extra costs, he believes it will have negligible effect on the market.
“In my opinion, I don’t believe foreign investors are driving the market,” he says.
Christopher believes anecdotal evidence that Chinese buyers are outbidding Australians is misleading, as persons of Asian appearance are just as likely to be second or third generation Australians.
University of New South Wales economics professor Tim Harcourt agrees the government has been under political pressure to remedy the false impression that foreign buyers are “leap frogging” locals at auction.
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“There is a big view young people are being outbid at auctions by Chinese and Indian buyers,” says Harcourt, who believes tax concessions such as negative gearing have had a far greater impact on the property market.
“I think most young people are being outbid by baby boomers. Of course you can’t have a baby boomer tax, so it is easier to do it with foreigners.”
Harcourt says the extra fees are unlikely to have a fundamental or long-term impact on the Australian economy, but may “shakeout” some speculative investment from the market.
He says most overseas investors will see the benefits of “the chance to get to the lucky country” as outweighing any extra fees.
“The big players know what a great investment it is to live in Australia,” he says. “They’ll see it [the fees] as nothing compared to the return they’ll get.”
Tim Lawless, CoreLogic RP Data head of research, told SmartCompany any additional fee on the purchase of a dwelling is going to act as a disincentive rather than an incentive for foreign buyers, however, on a $750,000 new dwelling, a $5,000 fee equates to only 0.7% of the purchase price.
“Our view is that the announcement of the application fee on foreign purchases is that the disincentive is not substantial enough to act as a noticeable break on foreign housing demand,” says Lawless.
“From any perspective, foreign buying activity needs closer monitoring, tracking and enforcement by FIRB which will incur an expenditure from the government. This expenditure needs to be funded, and the application fee appears to be a valid way to raise the funds required.”
He says the introduction of greater penalties will likely deter those doing the wrong thing and make them “reconsider their actions”.
Meanwhile, the Treasurer also flagged extra fees for foreign companies looking to take over Australian businesses, raising concerns additional fees may put off foreign acquisitions of Aussie companies.
Foreign businesses applying to the Foreign Investment Review Board (FIRB) for approval to buy out Australian companies valued at more than $1 billion would pay a fee of $100,000, while those looking to purchase under that threshold would pay a fee of $25,000.