Should Australia emulate Canada's foreign property investment ban?
Would a ban on foreign property investment, as has been implemented in Canada, improve housing affordability in Australia?
In an attempt to rein in property prices and reduce the number of homes sitting vacant, Canada this month took the major step of banning foreigners from buying residential property.
Given the property market similarities between Canada and Australia in terms of price, supply, affordability and even political and social culture, it raises the question of whether Australia’s still expensive real estate would benefit from such a prohibition.
The Canadian ban, a two-year measure for now, was first proposed by Prime Minister Justin Trudeau when property prices were soaring but as in Australia and for mostly the same reasons, prices have recently eased.
There is a widely held perception in Australia that foreigners drive up property prices and make life difficult for first home buyers.
A survey found a clear majority of Australians (82 per cent) felt foreign buyers from China pushed up Australian housing prices. Around seven in 10 Australians (69 per cent) also said Chinese investors in Australian real estate had made it difficult for first home buyers in Australia to enter the market.
But the reality is that foreign buyers only account for around 1 per cent of total transactions in the Aussie property market and 4.6 per cent of new development purchases, so their impact is limited.
First home buyers are probably immune to the impact of foreign buyers too, with overseas investors on average spending $1.5 million on their property purchase.
Foreigners living overseas are only allowed to buy new or off-the-plan properties for investment, which also limits their impact on the price of established properties.
Ban could raise Australia's property profile
Real Estate Buyers Agents Association (REBAA) president Cate Bakos said Canada’s ban could generate more interest from international buyers in Australian property but said foreigners already had to overcome significant tax and approvals hurdles.
“There could indeed be some implications if Australia was to take this same stance as Canada and it’s important to note some of the various reasons why foreign purchasers make the decision to buy in Australia,” Ms Bakos said.
“Not all foreign buyers are doing so purely for investment reasons.
“Some are parents sourcing properties for student children, while others include parents attempting to stay part-time in a carer capacity for student children.
“Importantly, our country limits foreign investment activity in residential, agricultural and commercial land and foreign buyers are subject to Foreign Investment Review Board (FIRB) approval.
“The limitations are reasonably strict and most foreign buyers are only able to purchase brand new property as opposed to established.
“Our current new building rate is limited as it is, so I’d argue it’s quite difficult for foreign investors to target Australian property at present.”
New dwellings represented 68.6 per cent of international buyer purchases, followed by 18 per cent for vacant land, and 13.4 per cent for established dwellings in 2020‑21.
Head of Research of buyer’s agency InvestorKit, Arjun Paliwal, said the current rules meant foreign buyers were supporting housing supply creation, given only 13.4 per cent of a very small base of transactions go on to compete in the established market.
“In Australia, we already make foreign buying of property difficult through regulations and expensive through surcharges and taxes,” he said.
“Australia following along with other countries on a ban on foreign property buyers would be a decision that is misguided and one that would not make any meaningful difference to housing affordability.”
Ms Bakos added that the two most expensive taxes and duties are already a disincentive to many foreign buyers.
“Land stamp duty rates are significantly higher for foreign buyers as are land tax rates.
“While they may be eye-watering for some, for those who can afford the taxes and duties, our tax revenues are tolerated.”
Canada’s ban could actually raise the profile of Australia among foreign investors.
“Australia can expect to see an increase in buyer interest as a result of Canada’s decision.
“Our two countries share some parallels and it’s fair to assume that Australia will be considered an alternative option.”
To alleviate the problem of foreign-owned homes sitting empty, Victoria’s state government has introduced a vacancy tax for foreign owners not utilising their homes. This annual tax is set at 1 per cent of the capital improved value (CIV) of taxable land (or $10,000 on a million-dollar home).
High taxes an investment deterrent
Even allowing for the Canadian ban, there’s no guarantee Australia will be best placed to attract foreign investment in residential property.
Real estate agent with aussieproperty.com, Steve Janes, said foreign investment in Australia was used as an economic stimulus in during the previous GFC downturn.
“The construction boom, particularly high-rise development and house and land packages, of the past decade targeted foreign investment and largely insulated us from global downturns and later boosted our economies,” he said.
“Over the last two to three years, however, foreign investment has already been deflected with increases to foreign buyer stamp duty and inflated FIRB costs to the point that today Australia is already far less attractive for foreign investors, many of whom will most likely continue to divest and seek higher returns elsewhere.”
China opens investment door
Canada’s ban came just days before China threw open its borders and international real estate investment is expected to be invigorated as a result.
Top countries for Chinese property buyers
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Kashif Ansari, CEO, Juwai IQI, said Chinese international property investment dropped by 50 per cent to 60 per cent during the pandemic but is already beginning to recover from its pandemic lows.
This will be the first opportunity in three years for most Chinese to visit overseas real estate markets,” he said.
“China has gone from virtually sealed off to nearly wide open within just a couple of weeks, and travellers’ priorities include visiting family and friends, studying abroad, business, tourism and property investment.”
“We expect Chinese outbound travel and accompanying property investment to increase rapidly in January from its current very low level.
“We can’t bounce back to 2019 levels all at once but outbound travel from China will snowball and may reach 2019 levels by mid-2024.”