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Impact of Overseas Property Investors

overseas property investorsIf you’re a millionaire from China and you have decided to bring money to Australian shores, here’s something to smile about: our country would love to have you. If you have any doubts about that, let’s check the stats. Australia offers you permanent residency if you have $5 million to invest in our real estate. You will be startled to see how it compares with global stats.

Stats from across the globe

The United Kingdom offers residency for only 5 years for investing a million pound (AU$2.13 million) and Spain lets you enter its shores for a ballpark figure of AU$760,000, but you can be a resident as long as you retain the property.

Australia offers the most lenient passage to overseas property investors

Doesn’t the data clearly show that Australia is quite willing to offer the easiest passage to overseas buyers? And just so you know, there are countries like Canada which basically cancelled its Investment Visa because there was a deluge of Chinese applicants looking for safe haven in places like Vancouver.

Revoking the investment visa (an example made by Canada)

The Canadian government, for its part, is bothered by the panic spreading among its citizens and also got concerned about how this could really hit the balance of the country’s property market. To cut the long story short, they canceled the investment visa in early 2015, a move which is unthinkable as far as the Abbott government is concerned.

What is causing the tide of Asian investors?

australiaBefore understanding how overseas property investors change the dynamics of the Australian property market, the dangers they pose, and what illegal angles (money-laundering) they can introduce to the Australian property market, let us understand why a country like China can’t get its millionaires to stay home.

China has made rapid progress in the last couple of decades but the progress has largely been an economic one. Politically, the land is a sweltering pot of instability. Moreover, Chinese parents do not want their offspring to grow in the polluted environment that many parts of the country has become.

The dream of a “safe haven” like Australia automatically becomes enticing. It is a land that can offer quality education to their children, political and social stability, facilitate economic rewards, and give a peaceful life within its shores. Naturally, overseas buyers, especially from East Asia, rush headlong.

Moreover, the success story of Sydney, the continued good performance of Melbourne and the anticipated rise of Brisbane gives them a good feeling about making property investments in these shores. To them, these are overseas markets rebounding from a slowdown and lot of money can be made in such places.

And what more do they believe?- Well, they believe in buying property here and making a great deal from their investments in a few years, expanding their portfolios in the process, and becoming richer over time! The dream of peaceful existence and good money can inspire anyone.

Add the devalued Australian dollar and the low interest rates for good measure, and there’s the perfect recipe for the Chinese, who, lest I forget, invested $10 billion more than the USA in Australian real estate in 2013-14.

But what can their property market aspirations cost us?

money launderingWe are not inclined to deter foreign investments in our property market but they pose problems without doubt. Even if we could turn a blind eye to the economic turmoil that the entry of overseas investors could bring for local investors and first home buyers, how can we overlook the legal aspect of it?

Check out this statistic: Overseas buyers poured in $37.4 billion into the residential property market of Australia in 2013-2014. The figure pretty nearly doubled itself in comparison to the preceding year. During the same time, approved investments almost doubled themselves, too (from 11,668 to 23,054).

ATO is fuming

These figures are not in any way small, so it becomes crucial that investments on such levels are made in an ethical way. We are talking about sums that can overturn the fundamentals of an economy here, after all. The Australian Tax Office has many reasons to believe that foreign buyers are not making investments compliant with Australian laws.

The illegal property investment situation is of our own making

But aren’t we to be blamed for the current situation? We are happy to levy a fee regime of $5,000 or $10,000 on overseas investments under and over $1 million(respectively). We wax eloquent about how this can bring $200 million of yearly revenue to us. We expedite visa formalities for the overseas crowd, we let them breach our forts because of our foolishness and greed. So, take a close look where it has brought us.

It is not hard to decipher that at least some of those who are willing to put millions in investments and thousands in fees will also look for loopholes to conduct illegal acts of money-laundering, all in the name of buying Australian property. Once the rot spreads, how easy will a clean-up be? It certainly wouldn’t be a walk in the park.

ATO aims to go after violators

????????????????Yes, the ATO has toughened its stance on the matter. It is talking about jail terms of up to three years and huge monetary penalties for breaching rules of property compliance (in the vicinity of $127,500 and $637,500 for individuals and companies respectively). However, all I see is a vision of constructing a dam after the flood has taken us in.

Despite tightening screws, a lot of loopholes remain and unethical foreign investors can work the web of their fraud round them. Here’s an example of the task at hand for ATO.

A recent example of money laundering

A very rich taxpayer had, over the last half decade, foreign transfers in excess of $4 million. What makes things more interesting is the fact that this same taxpayer can be linked back to many Australian properties. What kind of ownership structure was allowed? Was the structure compliant with the urban land trust purchases? Did it breach the Foreign Acquisitions and Takeovers Act? These questions warrant an answer and the ATO may just have arrived at the scene of the crime a bit too late.

Foreign property investment is useful……

I know, and cannot deny, that the impetus created by foreign buyers increase our new housing supply. What it does is keep the supply of rental properties coming and cushions Australia against a rapid rise in rental rates.

…..but let us prefigure the cost at which it arrives

But can this come at the cost of hapless local buyers who are elbowed out of the race by prices driven high due to competition between overseas buyers? And the story only darkens when illegal buying comes into the picture because this can raise prices even further, beyond the reach of the local buyers and investors.

Fee regime criticised

The fee regime has been criticised. There are talks about it being against the principles of Free Trade. Ladies and gentlemen, we Australians are only trying to save a sorry situation, so please bear with us. It is our duty to create a level playing field, maybe even a slightly inclined towards our local investors but not at any rate towards the foreign investors (as the case is presently).

Partial amnesty can lure unethical investors

ATO amnestyHere’s wishing that front companies become a thing of the past, money is prevented from being laundered through Australian property market channels and at least a few unethical overseas investors come out in the open and confess now that the government has talked about partial amnesty to those who do so.