Report into foreign investment in residential real estate could come too late

Earlier this week, it was announced Treasurer Joe Hockey had asked the House Standing Committee on Economics to investigate foreign investment in residential real estate. Today, the Terms of Reference was announced.

Chaired by Ms Kelly O’Dwyer MP, the house committee will examine:

the economic benefits of foreign investment in residential property;

whether such foreign investment is directly increasing the supply of new housing and bringing benefits to the local building industry and its suppliers;

how Australia’s foreign investment framework compares with international experience; and

whether the administration of Australia’s foreign investment policy relating to residential property can be enhanced.

Submissions can be submitted by Friday 9th May 2014 and the committee will report by 10th October 2014.

Australia’s foreign investment policy has been designed to allow foreigners to invest in new residential housing with the objective of creating new supply, but there is strong evidence foreigners are flouting the laws and using back doors to buy existing housing, putting upwards pressure on domestic house prices and creating heighten risk of economic instability.

The Sydney Morning Herald Domain’s Lucy Macken reported today:

Buyer’s agent Shane Clinton of Buying Houses Australia says overseas buyers often side-step requirements that they only buy new property by purchasing established dwellings in the name of already established family members.

“The significant investor visa has taken a while to get traction, it’s building now, but it means that to date 99 per cent of my clients have been buying outside the recommended visa guidelines,” he said.

In Mosman, where more than 30 per cent of prestige sales last year were to buyers from China, McGrath agent Michael Coombs said of the eight sales he made to Chinese buyers in the past six months, three were to visa holders and five were purchased in the names of a family member.

The influx of foreign buyers purchasing existing homes has been pushing prices up significantly in the two capital cities Chinese immigrants favour the most. RP Data-Rismark indices show prices surged 13.4 per cent in Sydney and 11.9 per cent in Melbourne in the twelve months to January 2014. The inquiry will hold public hearings in both Sydney and Melbourne.

Kelly O’Dwyer said late last week, “We need more homes, so foreign investment that increases the number of homes available is a good thing, particularly where it is housing for first-home buyers”

“That is the objective of current policy, but we need to examine what is happening on the ground.”

But O’Dwyer warns Chinese buyers could be pricing Australians out of their own market at a time when Housing affordability is at extremes (Bubble Territory). “The great Australian dream to own your own home is hard enough to achieve on two incomes, with years of savings and a large mortgage,” she said.

“We need to make sure that we aren’t making it more difficult — which is why we are going to examine the facts in our inquiry.”

The inquiry comes after Canada announced the axing of a 28 year old visa scheme (Immigrant Investor Program) designed to attract foreign residential real estate investment in Canada. Under the scheme if, as a foreigner, you had $1.6 million CAD in net assets and you could lend the Canadian government $800,000 CAD for five years interest free, you could expect permanent residency for you and your family and expedited citizenship.

Citizenship and Immigration Canada (CIC) spokeswomen, Sonia Lesage, said the abused scheme contributed little to the Canadian economy, “Except the $800,000 interest-free loans, immigrants from the investor program contributed little to the economy.” In a statement, CIC said “Research shows that immigrant investors pay less in taxes than other economic immigrants, are less likely to stay in Canada over the medium-to-long term and often lack the skills, including official language proficiency, to integrate as well as other immigrants from the same countries”

Canada’s decision followed debate that Canada’s already bubbly housing market, particularly Vancouver, was being overheated by Chinese investors and posed significant economic stability risks. Such investors are now likely to flood the Australian market instead.

The other driver is believed to be China’s faltering economy. Chinese citizens are scrambling to shift their wealth out of wealth management products in their homeland as the country hits road bumps developing in the country’s shadow banking sector.

Friday week, the House of Representative’s Standing Committee on Economics had a public hearing reviewing the Reserve Bank of Australia’s Annual Report for 2013. It spent quite some time questioning Governor Glenn Stevens, Deputy Governor Philip Lowe and Assistant Governor (Economic) Chris Kent on foreign investment in the residential housing sector. Below is an uncorrected proof of evidence taken before the committee:

The role of foreign investors in driving up capital city house and the Canadian government’s decision to axe the Immigrant Investor Program:

CHAIR [Kelly O’Dwyer]: I will move onto the issue of housing, because this is very much a barbecue stopper in Australia. With house prices continuing to soar in major cities, there is a lot of talk about foreign investment underpinning those house prices. Are you worried about the role of foreign investors in driving up capital city house prices? Also, we recently saw the Canadian government make it more difficult for foreign investors to buy homes in Canada. Will this have implications, in your view, for Australia?

Mr Stevens: The question of how prominent foreign investors are is a difficult one to answer. I travel through Singapore a number of times a year on the way to interminable meetings in Basel. It is quite noticeable when you pick up a Singaporean newspaper on the plane to see advertising for Australian property, as well as property in other countries. So there is no doubt that wealthy foreign investors have an interest here. In particular parts of our cities, including where we are sitting right now, the role of foreign investors is quite prominent indeed. I suspect it is rather less prominent around most of the metropolitan areas than some of the headlines might suggest; nonetheless, there is a role. As a country we tend to feel that we should be open to foreign investment—we generally like that. This is a form of that, just as foreign investors buying shares in listed companies or doing direct investment in resource projects or whatever it might be is a form of it. It has its effect on asset values and the exchange rate, just like all the other forms of foreign investment.

I suppose the question is really: how big a problem do you really think it is? Foreign investors are generally confined to buying new structures. That is where it is easiest for them to come in. It cannot be beyond our capacity over time to meet that demand and to meet the legitimate demands of our own citizens for structures as well, can it? If we cannot do that, if there is a supply side constraint, I would say that is an issue worth addressing in its own right. Beyond that, it probably goes to broader questions of how welcoming we wish to be to foreign investment generally. That can be a vexed issue at times. With all due respect, that is a matter for our parliament to manage.

CHAIR: Certainly. I am sure there are lots of people with a range of views on that at this table alone.

Mr HUSIC: I think that was the ‘over to you’ comment.

CHAIR: I would like to pick up on the final part of my question, regarding Canada and their decision. Do you think that is going to have broader implications for us in Australia?

Mr Stevens: I cannot say I am across the fine details of their decision, but perhaps your question is whether that will divert—

CHAIR: Correct.

Mr Stevens: I am not sure that I can give an informed answer or quantify that. I suppose decisions like that just show that this is an issue in a number of countries. I am aware that Canada has had a fair bit of investment from Asia into the west coast, and we have had some of that ourselves over quite a run of years. But I cannot quantify the extent to which that might lead to a spillover in our direction.

Chinese Investment in Australian Residential Property and the Shadow Banking Sector:

Mr HUSIC: On the issue of overseas interest in Australian property, particularly from the perspective of Chinese investment, how much do you see this as reflecting what is happening in China in terms of the growth of shadow banking there? Is the RBA keeping tabs on how the Chinese government is managing that issue and do you see that it is going to continue to grow in the medium term?

Mr Stevens: We do put quite an effort into trying to understand what is happening in the Chinese economy and I think all the issues with shadow banking are really the key issues right now. I think public commentary really frets a little bit too much about monthly ups and downs in Chinese PMIs. I do not think that is really the issue. The issue is whether the build-up in credit that they have had through these sort of off-balance-sheet devices can be effectively managed. That term ‘shadow banking’ is in some ways a bit apt because it is not terribly transparent, from this distance anyway, and so it is very hard to know and to form a good judgement here. All I can say is that we are acutely sensitive to that set of questions. On whether shadow banking in China is the source of Chinese investment in Australia, I do not know, but I suspect that the bigger force is probably that the Chinese population, or segments of that population, have become quite affluent pretty quickly and, as people do when that happens, one of the things they do is acquire assets in other places. Just as Middle Eastern and Russian money likes to have places in London, I think there is a certain sense in which many affluent people in Asia—and it would not just be China, it would be other countries in Asia too—like to have property in Australia. That is a feature of the modern world.

Mr HUSIC: Picking up on your point about shadow banking not been transparent. I have been alarmed at a dramatic description this is a Sino equivalent of subprime. Is there reason to be concerned if there is not an ability to get a handle on where this growth is headed and what impact it might have?

Mr Stevens: People do like to dramatise things. I think it is likely that asset quality in some of these entities is poor. It is very likely that—and I do not think that the authorities in China would deny this—the big surging credit they had during the financial crisis when everybody was stimulating their economies by pumping a lot of credit into the system is problematical. In fact it is virtually certain that some of those loans, if they have not gone bad yet, will go bad. I think the question really is: how good a handle do the authorities there have on that problem? I would not have much doubt that they have the resources to fix it in time. The question will be how quickly they can get on top of it and get ahead of it. I cannot give you a very accurate answer to that, but my observation is that they are very competent people. They are acutely sensitive to this problem and so there is as much confidence as you can have that they will get on top of it.

Foreign Investors are not Borrowing Money from our Banks, Thank-God:

Mr BUCHHOLZ: Just picking up on the previous questions on that investment coming from offshore into the housing market, do you have not a concern but an opinion on the number of cash purchases that are coming in? Some of the reports are that we are seeing an increase in price, but some of the feedback from the banks is that mortgage data is not on the same trajectory, which would lead you to the perception—

Mr Stevens: I do not think the foreign buyers are borrowing money from our banks.

Mr BUCHHOLZ: No.

Mr Stevens: Most of them are probably not borrowing money from any banks. As I said earlier, these are quite possibly quite affluent people. This is very anecdotal but, if you are sending your children to study in Australia, you are probably an affluent person and quite possibly, in some cases, you have purchased an apartment in which they would live or which you might come and stay in when you come to visit them. There are people who are wealthy enough to do that. So we do not really know. We do not have data. If they are borrowing from a bank in another country, obviously we do not know. I would hazard a guess that many of these people are not borrowing money.

If we do see a surge of foreign Chinese buyers due to Canada’s decision to axe its Immigrant Investor Program and increasing instability in China’s shadow banking system propped up by new stimulus, then a report due in October 2014 and any action by the government (if any) at a later date might just be too late.

» Australian Parliament releases terms of reference for foreign property investment inquiry – The ABC, 19th March 2014.
» Rorting of Australia’s tough foreign property rules ‘prevalent’, insider warns – The ABC, 19th March 2014.
» Putting a roof over your head is becoming a major challenge – Kelly O’Dwyer (Chair) for News Limited, 15th March 2014.
» Inquiry into foreign investment in residential real estate – House of Representatives, Parliament of Australia – 19th March 2014.
» Inquiry into foreign investment in residential real estate – Media Release – House of Representatives, Parliament of Australia – 19th March 2014.
» Fears Chinese investors are pricing first-home buyers out of the market will be investigated by parliament – The Telegraph, 15th March 2014.
» Do Chinese buyers like your neighbourhood? – The Sydney Morning Herald, 19th March 2014.
» Shunned Chinese buyers to turn from Canada to Australia – The Sydney Morning Herald, 24th February 2014.