MPA explores whether the government's crackdown on foreign buyers is theatre or threat
After years of inaction, the government wants to strengthen rules on foreign buyers, and introduce new fees. MPA’s Sam Richardson reports on whether the measure is political theatre, or a genuine threat to brokers.
Call it a publicity stunt if you will. When Australia’s Treasurer effectively evicts China’s 15th richest man from his Point Piper palace, and then brags about it in Parliament, you can’t help but pay attention.
Hui Ka Yan broke the rules, of course, by buying the established property through a string of companies, flouting the Foreign Investment Review Board’s regulations. But perhaps it was Joe Hockey’s overenthusiastic response that led Yellow Brick Road chairman Mark Bouris to label the entire episode “a diversion”, when talking to News Corp journalists. “That is just one buyer. That $39m doesn’t distort the market ... there are not too many of those floating around.”
Undoubtedly, not many of us can fork out the $39m asked for the property in the current 90-day ‘fire sale’. Yet there are two ways of seeing Hockey’s move: as a diversion, or as a U-turn. With a host of new charges and strong rhetoric on ‘cracking down’, we may be seeing the end of a decade of government tolerance of foreign buyers, with wide-reaching consequences for brokers.
Context: The options paper
More important than the entire mansion incident was the government’s options paper, released just a few days earlier in February. Titled Strengthening Australia’s Foreign Investment Framework, it starts by assuring readers that foreign investment “plays an important and beneficial role in the Australian economy” but acknowledges the “growing community concern” at residential and agricultural investment.
The Treasury report also considers creating a dedicated investigative unit within the ATO for regulating foreign real estate investment. For those who break the rules, a number of new penalties are suggested, including up to two years’ imprisonment for third parties who assist individuals in breaking the law, or a $85,000 fine. However, a previous inquiry into the issue by the House Economics Committee found that no one had actually been prosecuted since 2006.
Foreign buyers who stick to the rules were also mentioned in the report. Item 42 of the report states that “the Government is considering charging a fee on all foreign investment applications to fund screening, compliance and enforcement activities and
improved data collection around foreign investment”. These fees would start from $5,000 for properties under $1m, and increase by increments of $10,000 per extra million.
Effect on foreign buyer appetite
While $5,000 is a lot, it’s not quite enough to financially hurt buyers, according to the leading brokers MPA consulted.
ACA Mortgage Solution’s Raymond Xue, MPA Top 100’s number one broker, deals with a large number of mainland Chinese clients, and is not concerned. “The impact will be minimal ... if people want to buy a property, they will have sufficient money to buy the property. I think $5,000–$10,000 is really a small portion for them,” he says.
Both Xue and MPA’s number one commercial broker, Diana Liu, note that the recent fall in the value of the dollar would make the fees near-irrelevant. “Australian currency is at a historic low,” Liu explains. “It has decreased by 20–25% against the renimbi. So if you’re buying a property, and the price is $500,000, you’ve already saved a greater amount in terms of the currency, so I don’t think the $5,000 is going to impact a lot until the time when the Australian dollar comes back.”
Justin Doobov of top independent brokerage Intelligent Finance says the objective of the fees remains unclear. “I think they need to decide the rationale behind the fees; from looking into it, it looks like they’re just trying to recoup the administration costs. Either way, I don’t think that’s going to hinder someone buying a property.”
Indeed, Sydney’s Eastern Suburbs, Doobov’s local area, boast prices that dwarf the proposed new fees. A $600,000 property would usually require a deposit of $150,000 for most foreign investors, he points out.
Effect on affordability
With limited effect on foreign buyer appetite, it’s therefore questionable whether the proposed fees would have any effect on housing affordability. Affordability is at the heart of public fears surrounding foreign investors, who are blamed for raising average house prices in certain areas.
Our brokers have different views on this issue. Doobov believes the fees would simply cause investors to bring over more money, and price inflation would continue unabated in Sydney. Conversely, Xue believes fees could help restore affordability, but only if they’re 10 times higher. Fees will work, he claims, “if they make the effort; if they’re going to build more housing, and if more regulation comes out for investors. Maybe they should increase the fees from $5,000 to $50,000”.
Indeed the link between foreign buyer appetite and rising house prices is itself questioned. REIA president Neville Sanders’ introduction to Adelaide Bank/REIA’s recent Housing Affordability Report states that “foreign buyers predominantly buy property at a much higher price than Australian first home buyers, who nationally have an average loan of only $308,444. The average price of an established home purchased by a temporary resident is over the $1M mark at $1.064M while the average price of an off-the-plan development acquired by a foreign investor is $647k”.
MFAA CEO Siobhan Hayden told MPA that improving affordability would also mean improving the supply of homes relative to demand. “Only following an independent review would it be sensible to suggest further provisions regarding foreign investment,” she said. “Of critical concern within Sydney especially is our ability to increase the supply of property relative to demand.”
Brokers’ take on government intervention in the sector
While the proposed fees won’t break the bank, could they be sending a negative message to all foreigners? Hockey told Parliament that the government “welcomes” foreign investment, “but it is vitally important that every Australian knows that the rules relating to foreign investment are going to be enforced”. However, the chief executive of Chinese language real estate website Juwai dubbed the crackdown “racist”, and Yellow Brick Road’s Bouris and others have suggested that buyers with Chinese names are being confused with foreigners.
However, the broker and industry associations MPA spoke to have a variety of views on the issue. “I don’t think they’re looking to turn away foreigners,” ACA Mortgage Solution’s Xue says. “$5,000 or $10,000 is reasonable for the administration cost. Maybe if it was too much they’d be saying they don’t want foreign investors ... but at this stage I don’t think it’ll have any major impact. They’re tightening it a bit, with more regulation, but definitely not turning them away.”
Donald Tang, of up-and-coming brokerage Alliance Mortgage Solutions, notes that “property investment regulation has been formed way back before the foreign buyers’/ investors’ market was booming … our government is working hard to reform the regulation that will minimise the small percentage of black sheep to ruin the brokerage market and create unfairness for the group of people who follow the rules”.
The regulations to which Tang refers have not been updated since 2001.
Government action is a “good thing”, according to Diana Liu. “You don’t want all the Australian policy purchased by foreigners. So I think government bringing out this kind of rule is positive in terms of politics, and [the government] should be balancing the economy with the need to not be [taken over] by foreigners.”
Industry associations also saw the regulation as feasible. Peter White, president of the FBAA, says, “Such fees are not uncommon around the world. I don’t see these as unreasonable and/or stifling incoming investors.”
The government’s proposed fees are similar to those in New Zealand, and lower than those in Singapore and Hong Kong.
Where brokers fit in
Evidently, the government’s newfound interest in foreign buyers won’t do much to deter those buyers themselves. However, brokers should take heed of the precedent the proposed fees have set, and of the message that the government is willing to take action in response to breaches of the law.
At Intelligent Finance, the fact that affordability is not likely to improve soon has led to a new approach to pre-approved clients. “In the last couple of months we’ve noticed our clients are a lot more successful at auction; these strategies we give them, the way we get their approval done, allows them to be more successful at auction.”
Alliance Mortgage Solutions’ Tang argues that tougher penalties for rule-breaking will actually benefit top brokers dealing with foreign clients, by “stopping the black sheep [who] continue ruining the market and spreading out negative messages. So when this group of people get caught, the good prospects are likely to get back on track with the good brokers”.
Similarly, MFAA CEO Williams suggests the high-profile Point Piper case should remind brokers of the importance of knowing the regulations governing foreign investment. “Any businesses that currently specialise in foreign investing would ideally be well versed on their client’s obligation to make their purchase contracts conditional on foreign investment approval when they are buying residential real estate in Australia. The media coverage of this forced sale will ideally elevate to any business that does not normally work with foreign investors the need for additional considerations for these purchases.”
Staying safe legally
MPA asked Gadens partner and financial services expert Jon Donovan whether new regulations could be a threat to brokers. Here is the summary of his response:
“The Foreign Investment Review Board attack will be primarily aimed at real estate agents and lawyers and conveyancers who ignore the law or assist people to circumvent the law. It is uncertain how hard FIRB will go in investigating these practices.”
“… Brokers who are involved in assisting getting around FIRB could be prosecuted and could lose their licence to act as brokers. This is because brokers are expected to act ‘efficiently, honestly, and fairly’ – a condition on all credit licences. Brokers who do not know of an FIRB breach should not be in trouble, but it is appropriate to make reasonable enquiries to determine whether foreign buyers have approval if it is needed.”
Related articles:
What do most foreign investors want?
Call it a publicity stunt if you will. When Australia’s Treasurer effectively evicts China’s 15th richest man from his Point Piper palace, and then brags about it in Parliament, you can’t help but pay attention.
Hui Ka Yan broke the rules, of course, by buying the established property through a string of companies, flouting the Foreign Investment Review Board’s regulations. But perhaps it was Joe Hockey’s overenthusiastic response that led Yellow Brick Road chairman Mark Bouris to label the entire episode “a diversion”, when talking to News Corp journalists. “That is just one buyer. That $39m doesn’t distort the market ... there are not too many of those floating around.”
Undoubtedly, not many of us can fork out the $39m asked for the property in the current 90-day ‘fire sale’. Yet there are two ways of seeing Hockey’s move: as a diversion, or as a U-turn. With a host of new charges and strong rhetoric on ‘cracking down’, we may be seeing the end of a decade of government tolerance of foreign buyers, with wide-reaching consequences for brokers.
Context: The options paper
More important than the entire mansion incident was the government’s options paper, released just a few days earlier in February. Titled Strengthening Australia’s Foreign Investment Framework, it starts by assuring readers that foreign investment “plays an important and beneficial role in the Australian economy” but acknowledges the “growing community concern” at residential and agricultural investment.
The Treasury report also considers creating a dedicated investigative unit within the ATO for regulating foreign real estate investment. For those who break the rules, a number of new penalties are suggested, including up to two years’ imprisonment for third parties who assist individuals in breaking the law, or a $85,000 fine. However, a previous inquiry into the issue by the House Economics Committee found that no one had actually been prosecuted since 2006.
Foreign buyers who stick to the rules were also mentioned in the report. Item 42 of the report states that “the Government is considering charging a fee on all foreign investment applications to fund screening, compliance and enforcement activities and
improved data collection around foreign investment”. These fees would start from $5,000 for properties under $1m, and increase by increments of $10,000 per extra million.
Effect on foreign buyer appetite
While $5,000 is a lot, it’s not quite enough to financially hurt buyers, according to the leading brokers MPA consulted.
ACA Mortgage Solution’s Raymond Xue, MPA Top 100’s number one broker, deals with a large number of mainland Chinese clients, and is not concerned. “The impact will be minimal ... if people want to buy a property, they will have sufficient money to buy the property. I think $5,000–$10,000 is really a small portion for them,” he says.
Both Xue and MPA’s number one commercial broker, Diana Liu, note that the recent fall in the value of the dollar would make the fees near-irrelevant. “Australian currency is at a historic low,” Liu explains. “It has decreased by 20–25% against the renimbi. So if you’re buying a property, and the price is $500,000, you’ve already saved a greater amount in terms of the currency, so I don’t think the $5,000 is going to impact a lot until the time when the Australian dollar comes back.”
Justin Doobov of top independent brokerage Intelligent Finance says the objective of the fees remains unclear. “I think they need to decide the rationale behind the fees; from looking into it, it looks like they’re just trying to recoup the administration costs. Either way, I don’t think that’s going to hinder someone buying a property.”
Indeed, Sydney’s Eastern Suburbs, Doobov’s local area, boast prices that dwarf the proposed new fees. A $600,000 property would usually require a deposit of $150,000 for most foreign investors, he points out.
Effect on affordability
With limited effect on foreign buyer appetite, it’s therefore questionable whether the proposed fees would have any effect on housing affordability. Affordability is at the heart of public fears surrounding foreign investors, who are blamed for raising average house prices in certain areas.
Our brokers have different views on this issue. Doobov believes the fees would simply cause investors to bring over more money, and price inflation would continue unabated in Sydney. Conversely, Xue believes fees could help restore affordability, but only if they’re 10 times higher. Fees will work, he claims, “if they make the effort; if they’re going to build more housing, and if more regulation comes out for investors. Maybe they should increase the fees from $5,000 to $50,000”.
Indeed the link between foreign buyer appetite and rising house prices is itself questioned. REIA president Neville Sanders’ introduction to Adelaide Bank/REIA’s recent Housing Affordability Report states that “foreign buyers predominantly buy property at a much higher price than Australian first home buyers, who nationally have an average loan of only $308,444. The average price of an established home purchased by a temporary resident is over the $1M mark at $1.064M while the average price of an off-the-plan development acquired by a foreign investor is $647k”.
MFAA CEO Siobhan Hayden told MPA that improving affordability would also mean improving the supply of homes relative to demand. “Only following an independent review would it be sensible to suggest further provisions regarding foreign investment,” she said. “Of critical concern within Sydney especially is our ability to increase the supply of property relative to demand.”
Brokers’ take on government intervention in the sector
While the proposed fees won’t break the bank, could they be sending a negative message to all foreigners? Hockey told Parliament that the government “welcomes” foreign investment, “but it is vitally important that every Australian knows that the rules relating to foreign investment are going to be enforced”. However, the chief executive of Chinese language real estate website Juwai dubbed the crackdown “racist”, and Yellow Brick Road’s Bouris and others have suggested that buyers with Chinese names are being confused with foreigners.
However, the broker and industry associations MPA spoke to have a variety of views on the issue. “I don’t think they’re looking to turn away foreigners,” ACA Mortgage Solution’s Xue says. “$5,000 or $10,000 is reasonable for the administration cost. Maybe if it was too much they’d be saying they don’t want foreign investors ... but at this stage I don’t think it’ll have any major impact. They’re tightening it a bit, with more regulation, but definitely not turning them away.”
Donald Tang, of up-and-coming brokerage Alliance Mortgage Solutions, notes that “property investment regulation has been formed way back before the foreign buyers’/ investors’ market was booming … our government is working hard to reform the regulation that will minimise the small percentage of black sheep to ruin the brokerage market and create unfairness for the group of people who follow the rules”.
The regulations to which Tang refers have not been updated since 2001.
Government action is a “good thing”, according to Diana Liu. “You don’t want all the Australian policy purchased by foreigners. So I think government bringing out this kind of rule is positive in terms of politics, and [the government] should be balancing the economy with the need to not be [taken over] by foreigners.”
Industry associations also saw the regulation as feasible. Peter White, president of the FBAA, says, “Such fees are not uncommon around the world. I don’t see these as unreasonable and/or stifling incoming investors.”
The government’s proposed fees are similar to those in New Zealand, and lower than those in Singapore and Hong Kong.
Where brokers fit in
Evidently, the government’s newfound interest in foreign buyers won’t do much to deter those buyers themselves. However, brokers should take heed of the precedent the proposed fees have set, and of the message that the government is willing to take action in response to breaches of the law.
At Intelligent Finance, the fact that affordability is not likely to improve soon has led to a new approach to pre-approved clients. “In the last couple of months we’ve noticed our clients are a lot more successful at auction; these strategies we give them, the way we get their approval done, allows them to be more successful at auction.”
Alliance Mortgage Solutions’ Tang argues that tougher penalties for rule-breaking will actually benefit top brokers dealing with foreign clients, by “stopping the black sheep [who] continue ruining the market and spreading out negative messages. So when this group of people get caught, the good prospects are likely to get back on track with the good brokers”.
Similarly, MFAA CEO Williams suggests the high-profile Point Piper case should remind brokers of the importance of knowing the regulations governing foreign investment. “Any businesses that currently specialise in foreign investing would ideally be well versed on their client’s obligation to make their purchase contracts conditional on foreign investment approval when they are buying residential real estate in Australia. The media coverage of this forced sale will ideally elevate to any business that does not normally work with foreign investors the need for additional considerations for these purchases.”
Proposed penalties
As taken from page 11 of the Treasury’s Strengthening Australia’s Foreign Investment Framework, published February 2015
Third party assists foreign investor to breach rules
There is currently no civil pecuniary penalty under the Act for this breach.
Civil penalty
Specific offence to be included in the Foreign Acquisitions and Takeovers Act 1975. Pursue court action to impose a civil penalty.
The maximum civil penalty would be: 250 penalty units ($42,500) for individuals. Corporations subject to multiplier of five.
Criminal penalty
Knowingly assisting another person to commit a criminal offence is an offence under Section 11.2 of the Criminal Code (maximum penalty is 500 penalty units ($85,000), imprisonment of two years, or both).
As taken from page 11 of the Treasury’s Strengthening Australia’s Foreign Investment Framework, published February 2015
Third party assists foreign investor to breach rules
There is currently no civil pecuniary penalty under the Act for this breach.
Civil penalty
Specific offence to be included in the Foreign Acquisitions and Takeovers Act 1975. Pursue court action to impose a civil penalty.
The maximum civil penalty would be: 250 penalty units ($42,500) for individuals. Corporations subject to multiplier of five.
Criminal penalty
Knowingly assisting another person to commit a criminal offence is an offence under Section 11.2 of the Criminal Code (maximum penalty is 500 penalty units ($85,000), imprisonment of two years, or both).
Staying safe legally
MPA asked Gadens partner and financial services expert Jon Donovan whether new regulations could be a threat to brokers. Here is the summary of his response:
“The Foreign Investment Review Board attack will be primarily aimed at real estate agents and lawyers and conveyancers who ignore the law or assist people to circumvent the law. It is uncertain how hard FIRB will go in investigating these practices.”
“… Brokers who are involved in assisting getting around FIRB could be prosecuted and could lose their licence to act as brokers. This is because brokers are expected to act ‘efficiently, honestly, and fairly’ – a condition on all credit licences. Brokers who do not know of an FIRB breach should not be in trouble, but it is appropriate to make reasonable enquiries to determine whether foreign buyers have approval if it is needed.”
Related articles:
What do most foreign investors want?
