Foreign Investment Changes – Good Move or Bad Move?
There was a big announcement on Saturday by the Government in the lead up to the budget release on Tuesday. The Government announced that to even the playing field for local property buyers a number of changes will be introduced including:
- Charging foreign investors an additional stamp duty of 3% on the purchase of property from 1 July. On a home sold for $700,000, foreign investors will have to pay $58,070 stamp duty compared to an Australian resident who will pay $37,070.
- Charging foreign investors an additional land tax duty of 0.5%.
- Tightening up on illegal property purchasers by foreigners. The Government will be increasing penalties to $127,500 or 3 years jail as a deterrent. They have also given owners of illegal property transactions until 30 November to come clean and sell their investment without penalty.
If you have noticed house prices going bananas in the last 18 months, this is an insight into why. In the 2013 financial year foreign investors purchased $5.8b of property. In the 2014 financial year this increased to $14b. To put this in perspective, this is 20,000 dwellings at an average price of $700,000.
As an agent we sometimes see up to 75% of buyer enquiries are from foreign buyers on some properties. In many cases these foreign investors are competing against one another as the higher bidders, while ‘local’ and first homebuyers miss out. A recent example from a large developer selling over 200 lots in a new estate described how foreign buyers literally came in a bus and purchased 50 homes at once.
Australia is a desirable place to invest and live for foreigners, but the Government can see that it has become a massive problem, and this budget is trying to regain some balance.
So what does this all mean for buyers and sellers of property in the Melbourne market?
1) The government is predicting that with the additional 3% stamp duty, $279m will be raised over four years. Based on this, they expect foreign investors to purchase $9.3b of property in 4 years or $2.3b per year, a huge reduction on the $14b spent in Victoria last financial year. What this means is that the market could have a substantial correction if the wealthiest buyers are restricted. Competition could still remain strong as disillusioned buyers come back into the market, but they simply will not have the level of funds foreign investors were prepared to pay.
2) If the Government is going to force illegally purchased properties to be put on the market by 30 November, then there will potentially be a flood of properties hitting the market at once, increasing the supply against a reduced buyer pool. This will surely have a huge affect on some areas such as those large developments. It could be a real problem and put developers under pressure if they lose a large chunk of their pre-sales.
But do these changes even matters for homeowners? If you are upsizing or downsizing, you are doing so in most cases in the same upwards or downwards market. If you sell for $50,000 less than you could have in the booming market last month, then most likely you also be able to buy for $50,000 less. This leaves you in the same net position. Sometimes homeowners find it hard to accept their property has decreased in value, but it can actually be an advantage when buying. The real benefit in these changes is for those starting out. It will increase their chances of getting a foothold in the property market before it is too late.
It is a complex area and I would love to hear your thoughts. Comment on the blog or Facebook. Are these Government policies a good move or bad move for our state?
04th May, 2015