Crackdown on Foreign Buyers

The property market is set to change in Australia, with further price declines likely as state and federal governments initiate an aggressive crackdown on foreign investors. The Federal government has already introduced ownership caps and removed capital gains tax exemptions for overseas buyers, as NSW and Victorian state governments start their own initiatives in an effort to stop unsustainable price growth. The crackdown will mostly affect Chinese investors, who are also facing moves by their own government to prevent money flowing offshore.

Last year the Federal budget made things much less enticing for foreign investors by removing capital gains tax exemptions for overseas buyers. The budget also introduced a 50 percent ownership cap for new residential developments and introduced a “ghost tax” in an effort to stop so many properties from sitting empty. The Australian Taxation Office now have the power to fine foreign investors up to $5500 a year if they leave their properties empty, along with fines of up to $52,500 if they fail to lodge their forms.

While the situation is slowly changing, the vast majority of foreign property investment in Australia takes place in NSW and Victoria. Both states recently introduced their own measures, with the NSW government doubling stamp duty for foreign investors last year from 4 percent to 8 percent and increasing the annual land tax surcharge from 0.75 percent to 2 percent. According to Credit Suisse, this will have a big effect on the NSW property market, with 25 percent of all new supply in NSW purchased by foreign interests and Chinese buyers accounting for almost 80 percent of this demand. The Victorian government has introduced its own measures, including a vacant residential land tax with potential fines equal to 1 percent of the property’s value if they are left empty.

According to UBS head of global property research Kim Wright in an interview with The Australian, these new measures will have a huge impact on Chinese investors: “What we have found is that Chinese buying of property abroad tends to be very price and currency-aware. Their focus on specific markets will fade or pick up, depending on their view of currency. Over the last two years we have seen Asian buying of Australian property, specifically Sydney, Melbourne and Brisbane, that’s been very strong. It looks like that has started to fade over the past six months. I think it’s the combination of factors. Prices have been very strong in Australia so there is now a discussion that the cycle has started to peak and there’s the tax changes that have come through along with the tax controls.”

Less foreign money flowing into the property market may help conditions to cool, with national dwelling values falling by 0.3 percent in December according to CoreLogic data. According to AMP Capital chief economist Dr Shane Oliver, less Chinese money will mostly affect Sydney and Melbourne: “The Sydney and Melbourne property boom continues to deflate... Tighter lending standards, rising levels of unit supply, slower Chinese demand and reduced investor enthusiasm for property are all impacting and are likely to lead to further declines in Sydney and Melbourne property prices this year of around 5 per cent - maybe a bit more in Sydney and a bit less in Melbourne... It also provides a bit more room for first home buyers. However, other cities are running to their own cycles with Hobart likely to continue strengthening, Perth and Darwin close to the bottom and moderate growth in Adelaide, Brisbane and Canberra.”

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