Foreign Investment In Australia Is Shunned To Keep Prices Affordable
Governments are taking extreme measures to keep a handle on rampant Chinese investment. Could the U.S. do the same?
Want to buy an investment property in Australia? Good luck! In 2015, the Australian government made news by telling foreign investors their money was no longer welcome Down Under. It was a part of an effort to curb rampant home prices—inflated, largely, by Chinese buyers snapping up prime real estate in Sydney and Melbourne and making it impossible for Aussies to afford property.
The law applies only to previously owned residential property and not new construction. The government claims it’s been a rip-roaring success, forcing the sale of more than $76 million (70.5 million euro) worth of residential real estate which had been bought illegally by foreigners since Australia introduced its controversial investment regime.
The laws were introduced after foreign investment in Australia tripled in 2013-2014, with $35 billion dollars pouring into the market in 2014. The underlying fear was that large cities in Australia would be owned by overseas buyers—not Australian citizens. The move by Prime Minister Tony Abbott meant that in addition to a $5,000 entry fee for foreign buyers, a criminal penalty for those involved in illegal foreign sales and purchases would be increased to $127,500 or three years’ jail for individuals, and up to $637,500 for companies. Third parties who assisted foreign investors to make illegal purchases—like real estate agents, lawyers, and accountants—also faced hefty fines of up to $42,500 for individuals and $212,500 for companies.
And the government proved they meant business. Treasurer Joe Hockey ordered the Chinese-based Evergrande Real Estate Group to divest the property in March 2015 after finding its sale of the mansion to Chinese businessman Xu Jianyin breached foreign ownership rules. The businessman, who was reportedly worth $7 billion, still made over a million profit on the property, reportedly buying it for $39 million and selling for over $40 million.
Chinese investors, though, haven’t limited their purchases to Australia. They have inflated the values of several markets with unabated investing. London is one such market. Swiss Bank UBS compiled a report in September which stated that London has the second most over-valued property market in the world, beaten only by Vancouver in Canada.
That city slapped at 15 percent tax on foreign house buyers in August, again aimed squarely at Chinese investors, in an effort to cool the market. It caused a firm rebuke from the Chinese government backed, China Economic Information Daily which said, “Many people believe the (Canadian) government’s policy is reckless and irresponsible, and undermines its image and credibility.”
Such extreme measures to cool overheated markets have worked and could cause other governments such as those in the UK and possibly the U.S., where markets in New York and San Francisco are fueled by foreign buyers to consider such options. The U.S. has already cracked down on home purchases through shell companies, while Singapore, Hong Kong along with Vancouver have raised taxes on foreign buyers. Couple that with Australia’s foreign purchase ban and the scope of investment cities for Chinese investors to purchase real estate does appear to be shrinking.
That said, it’s doubtful that major U.S. cities will deter foreigners from buying real estate for two main reasons: The current president is surely a fan of foreigners buying up New York real estate. He has made his fortune from it. The real estate industry—brokers, developers, investors—would be up in arms if such a thing happened. Secondly, there is not same social conscience about Americans not being able to afford properties in major US cities as exists overseas.
There is, though, one factor which could stop overheated U.S. markets in their tracks—an increase in interest rates. Unless wealthy foreigners aim to buy all-cash, the looming Fed hike has buyers across the globe wondering if the gravy train is finally coming to an end.
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