Offshore investors buying property without FIRB approval - it's time for a full government investigation

As stories go, there won’t be many bigger this year than the offshore investors who appear to be buying Australian real estate without Foreign Investment Review Board (FIRB) approval.

Back in March 2014 I wrote: The end of the great Chinese property splurge?. This was gathering momentum as I heard that the federal government was about to announce an inquiry headed by federal MP Kelly O’Dwyer – probing offshore sales in Australia. In fairness I have watched this for quite a few years now and it was just not adding up – well not until now anyway.

The House of Representatives economic committee report has suggested that lawyers and relatives have been provided a passageway that bypasses FIRB approval as foreign investors believe the $85,000 fine for such a breach is simply the “cost of doing business in Australia”. It should be noted that since 2010 there have been no prosecutions, which is understandable as prior to this inquiry the government had absolutely no idea that this new Australian real estate acquisition method actually existed, let alone had become widespread.

Over the past 48 hours we are starting to get a clearer picture – FIRB powerless to identify or stop illegal residential purchasers, as Chinese investment surges. 

This is not the first time the federal government has been found wanting. I remember back in the early 1990s when the Australian Taxation Office (ATO) wrote to every real estate agency in Australia demanding a comprehensive list of every landlord transaction, rents received, tenants names, full disbursements together with every sale we had made dating back five years (the government back then was then moving into the computer era.)

There are a number of interesting points that I have observed in recent times; the first of which is that each and every property enquiry is actually home-grown. The suggestion that Chinese buyers are looking at China’s largest international property website Juwai simply does not stack-up. We have been paid subscribers to the Juwai website for a few years now and have never yet received a single enquiry – I have also spoken to a number of other agents/agencies who all say the very same.

To try and put this into perspective it’s vital we look at exactly what’s happening here given some agencies have spruiked that such an overseas market exists when the vast majority all confirm the actual contact comes from residents here in Australia – via the Australian property portals. I am yet to speak to an agent who has received an enquiry from a Chinese property portal so that should dispel that myth of where vendors should be redirecting advertising monies.

Another factor that requires consideration is that earlier in 2014 the Canadian government immediately axed its 28 year old visa scheme designed to attract wealthy foreigners to the country. Maybe it’s just a coincidence. However, Treasury advised the Inquiry that there is currently a surge in applications – 10,244 in the nine months to March 2014, compared with 6,567 in the entire 2012/13 year. When you’re buying a multimillion dollar home a fine of just $85,000 is insignificant when one looks at the big picture.

Given these recent revelations, many would now argue the fine should be a proportion of the purchase price, should the Abbott government decide to act on these revelations.

Yesterday the International Monetary Fund (IMF) announced that Australian house prices are among the top five most expensive in the world. This leads me to another observation.

Following “the recession we had to have” in the early 1990s we saw the emergence of a powerhouse new business model that drove our property markets through to the global financial crisis (GFC) – namely merchant banks.

Over the period of the GFC top-end property values dropped by up to 30% given the bankers were effectively removed from the property markets. In the interim we did see an accelerated entry into the prestige property markets by the mining fraternity albeit quick. The banks have re-calibrated and back into a better space in terms of profitability although there is serious doubt they will again dominate these markets again.

It has become very clear that the emerging new player in our top-end property markets has been the Chinese and up until now we all believed this was through the correct government channels. No doubt the vast majority did follow this process, but following what has been revealed in this inquiry the government now must fully investigate this matter.

I don’t believe the overseas investors are the main reason why we have seen a total collapse of first home buyers in Australia. Whilst they are an obvious contributing factor, we are forgetting that we are seeing unprecedented low interest rates where local and overseas investors have taken full control of this market demographic.

With governments across Australia now focused on building new infrastructure it is imperative that as a result of this inquiry a full investigation is launched immediately, as infrastructure drives property markets.

Last week the Premier Mike Baird announced that next week’s NSW budget will reveal a billion dollar plan to overhaul Spit and Military Roads. Now nothing has happened to these areas since they started construction on the Spit Bridge in 1952. The northern beaches are easily the most under-valued prime real estate in Australia because of this antiquated transport system. A vastly improved transport infrastructure would in all probability see top-end property prices potentially escalate by as much as fifty (50)%.

Based on this announcement this is the next Sydney boom area so it would be nice to see that those investing into these markets are 100% approved by the Australian government.