We need to direct foreign investment in real estate effectively - not stop it
Investment bank Credit Suisse couldn’t have coined it better when they asserted:
"The marginal buyer of Sydney and Melbourne real estate has changed, as have the drivers of property prices."
The words are taken from their recent report on international investment into the Australian residential real estate sector, with the intention to highlight potential opportunities for future speculation. And the statement is correct.
Anyone, who is in the business of buying or selling property, is acutely aware how the push and pull of both supply and demand in our property markets, has been markedly shaped by both a change in the local demographics of our nation, along with international competiveness in recent years.
The roll over influence on values in concentrated regions of our largest capital cities has, in some cases, been significant. And whilst it remains the subject of much angst for those priced out, I have yet to meet a seller who did not welcome this increased competition.
However, heated debate in the mainstream media around what has long been known in the industry as little more than a ‘tick box’ formalit, designed to detract from what remains a largely unaudited system of ‘non-resident’ investment in Australian property – residential or otherwise - by the Foreign Investment Review Board, has been going on since 2008.
As property editor, Robert Harley recently pointed out in the AFR;
“Even the ‘experts’ find the FIRB annual report.... tardy, lacking in meaningful detail and hard to reconcile with their own experience…”
And as the fictional character "Chodley Wontok" discovered last year, claims in the foreign policy document that applications are reviewed against the “national interest,” on “a case-by-case” level, do not go so far as a mere passport or visa check!
However, the sheer hysteria around this subject needs to be bought under control. And if we’re to make sure policies are correctly regulated and work in the national interest as ‘spruiked,’ the blame needs to be carefully targeted to areas of influence – namely, policy.
Something the government has to date, repeatedly failed to do.
A policy disaster
Following the 2008 crisis, Kevin Rudd decided to put in place measures to prevent any major deleveraging of household debt. One of these was to openly advertise ‘relaxed’ regulations around the acquisition of residential real estate for temporary residents, companies and developers selling solely to overseas buyers.
Whilst the wisdom of such a move was debateable, what followed was a truly disastrous state of affairs.
Attempts by Walkley Award winning journalist Chris Vedelago to obtain accurate data under the freedom of information act, to monitor the level of increased demand being widely asserted by industry advocates - was repeatedly frustrated.
According to the then Assistant Treasurer, Senator Nick Sherry, any effort to establish a greater understanding of the FIRB’s compliance system, was not in the public's “best interest.”
Instead, the government, then panicking over the consequential effect to their ratings in the polls, came up with the incredibly smart idea of a ‘dob-in’ hotline.
The hotline was designed to enable worried locals, to report those dubious looking foreign nationals, who were cleverly disguising themselves as local buyers and naughtily ‘bidding up’ neighbourhood prices.
“That would put a stop to it!” thought Kevin.
Unsurprisingly, from the limited number of calls received (although, once again, probably not from those vendor’s who were happily selling their properties in the rapid run up to the market peak of 2010), most turned out to be Australian citizens and long standing permanent residents. So, it did little - if anything - to stem the core of concern still prevalent within the community.
It is therefore of little surprise that anecdotal stories from agents, who maintain official figures that are under reported and rules are being flouted, continue to carry more weight. And a debate, which now walks a fine line between being termed racist or otherwise - continues unabated.
What’s going on?
Rising property prices - the product of the plot of land that sits underneath the structure - are unashamedly promoted in most modern economies as the key driver to boost the privatised wealth of its nation, with the hope the payoff effect will feed other areas of consumption.
They are no longer just national affairs, but open to international speculation and investment, of which Australia is by no means immune.
When the federal government states in its policy document that it “welcomes foreign investment” which:
“Has helped build Australia’s economy and will continue to enhance the wellbeing of Australians, by supporting economic growth and prosperity.”
You can assume toward the top of that list is the investment into the land market – residential or otherwise. And as official figures show, few – if any - applications are ever turned down and real estate captures the majority interest.
The recent recessions that have occurred in other countries as a result of their own residential speculative booms, have merely accentuated these international patterns of investment and migration.
For example, following the GFC, the number of foreign-born workers leaving Britain rose by nearly 30% as the government set about removing 300,000 skilled jobs from the list of positions open to workers from outside the European Union - evidently fearing political backlash from somewhat unsubstantiated claims, that this was significantly ‘harming’ British jobs and thus not aiding rising unemployment or the economy as a whole.
At the same time, distressed nations opened their doors to opportune investors from around the globe, who were encouraged to take advantage of now uniquely ‘cheap’ real estate markets, in a vain attempt to kick off a recovery in their own local terrains.
It was only a few years ago, stories were littering the main stream media highlighting the surge of demand for USA properties, as spruikers made benefit of our strong Aussie dollar to lure local investors to purchase previously owner-occupied foreclosures and instead turn them into investor owned speculative rentals.
None of this has assisted the home buying sector in America’s property market.
Ownership rates continue to fall and local buyers remain priced out.
But the government cares little – the gains in property are the silver lining Obama needs to maintain popularity. And he had no hesitation in boasting as such when he recently stated:
”Today, our housing market is healing!” (Healing!) “Home prices are rising at the fastest pace in seven years.”
Faster even than incomes it seems, with first home buyers at their lowest level since the crisis began.
Premium localities in the cities of New York and London are openly marketed as ‘safe havens’ for the internationally wealthy. Isolated from the local economy as local workers are forced out and rumours of homes laying vacant for much of year provoke neighbourhood outrage.
It’s now reported that in London for every minute you spend on the three Underground stops between Earls Court and Sloane Square, property prices rise by £96,647.
However (as with Australia), outside of half-hearted central bank ‘don’t spend too much’ warnings, there is little rush to limit the inflationary rises.
This pattern is always the same. It’s allowable to let productivity and industry fail whilst small businesses suffer, but woe to the government who allows the privatised wealth fund of its aging population endure any such demise.
Australia’s changing landscape
Australia is internationally marketed as the ‘lucky country’, an economic star on the world stage from which we derive much benefit.
Population growth throughout the GFC was barely dented – and like every other country, we tow away the poor, whilst targeting skilled migrants, or those with dollars to invest.
Over the last census period alone, Melbourne’s population expanded by nearly 355,000 new residents and continues to grow at pace of roughly 2% per year.
Additionally, its population has grown in diversity, with the traditional European migrants of Greece and Italy falling as a proportion, whilst the growing number to our shores now comes from both China and India.
Note: Settlers = skilled and family reunion migrants, along with humanitarian visas and refugees
The same trend is mirrored in NSW – projected to reach 8.4 million by 2060. Migrations to the harbour town also come increasingly from both China and India, as demonstrated below.
When, under Julia Gillard, the Government commissioned a white paper on ‘The Asian Century’ designed to:
“Generate a set of general propositions to guide policy development over the long-term.”
The importance and potential magnitude of Asia’s dominance on the world stage was emphasised, by Julia Gillard when in a speech she asserted:
“We are now seeing the most profound rebalancing of global wealth and power in the period since the United States emerged as a major power in the world.”
No kidding!
Indeed, it would be hard to over-estimate the economic force Asia holds for our local economy.
It will shape the most important social, cultural, business, domestic and foreign policy implications we will face in the decades to come.
By 2025 the Asian region will account for almost half of the world’s output and also be the world’s largest consumer – and if we play our cards right, Australia is best placed to advantage.
It’s not just the 1% of billionaires seeking out safe havens abroad in what’s been termed the “largest and most rapid wealth migrations of our time.” But the rise of China’s consumer class – middle income individuals, discretionary spenders, whose wealth goes largely under-reported in a “grey economy” of illegal and quasi-legal activities.
If trend continues, in a few years, China will become the world’s richest country, and India won’t be far in its wake.
The number of Asian students studying on our shores is at record highs.
Trade flows, research and business development, education, tourism, and increased levels of migration have benefitted us significantly in recent years - and the potential to capitalise on the productive sectors of our economy remain.
Whilst the Gillard government’s white paper - now firmly locked into “archive status,” - remains a useful form of reference. It was widely criticised at the time, for its vague approach as yet another study, which like a PHD paper is good in content, but lacks any hint of direct action.
It claimed that Australian manufacturing was expected to ‘grow,’ with wishy-washy advice on how firms must:
“Adapt by anticipating changes in their markets, building the talents of their people and constantly innovating and lifting their productivity.”
Claims which now seem laughable.
We allowed the profits from the ‘once in a century’ mining boom to fall into private hands.
As Sydney Morning Herald's economics editor Ross Griffiths recently clarified in his commentary on Abbott’s efforts to remove the mining tax:
“There is a lot of ‘unearned’ economic rent associated with the exploitation of limited mineral deposits,” and countries like Australia would be “mugs not to tax much of that rent rather than letting largely foreign companies walk away with most of it.”
‘Mugs’ we are.
But what about land?
Asia’s influence is marketed as positive news; however, the one area that receives the most overwhelming negativity is its influence on our real estate market, precisely because of the some of the issues hinted in the paragraph above.
We have little, if any, understanding of the accumulated wealth is brought into the country and recent settlers have little experience with the local market, or misleading practices surrounding real estate price quoting.
This lack of transparency and education within the industry itself needs addressing; however, it’s a subject I’ll explore further in another column.
The geographical location of land is fixed and limited in supply. Therefore we can’t all benefit from economic advantage gained from ownership of the best seats in town without effective taxation of the resource.
A correctly administered broad based land value tax (as explained here – reducing taxes on productivity) would not only encourage the good utilisation of land, but if handled efficiently, gains could be fed back into the community to assist increased investment into infrastructure and social services.
This would further aid both the expansion and development of our cities, with the flow on effect ideally taking the speculative element out of the housing market and assist in reducing its destructive influence on prices.
This alone, would go a long way to reducing the wealth inequality currently experienced in our big cities.
Presently, we’re doing a great job of building an abundance of cheap, high density, and no so inexpensive apartment blocks, full of small one and two bedroom flats, often no more than 60 square metres inside. Great for student renters - but do little to meet the needs of our biggest residential sector – family buyers with children.
Therefore, the above issues need to be tackled from ground up policy reform – significantly on the supply side.
Offshore investment must be solely channelled into creating new supply – and audited to ensure the conditions stated in current laws are being adhered to.
I’m not holding my breath, but hopefully some of these will be explored in detail and ‘maybe’ go so far as being implemented following the Senate inquiry later this year.
We can’t – and wouldn’t want to - stop migration. But we can ensure wealth invested in our established real estate market, is utilised effectively.