The case for tightening our foreign investment framework

Recommendations to strengthen the enforcement of rules around foreign investment in property are economically sensible, although some suggestions may prove controversial.

The public’s concern about foreign investment in Australian residential real estate is summed up early in the report handed down by the parliamentary committee examining the issue.

“There is no accurate or timely data that tracks foreign investment in residential real estate. No-one really knows how much foreign investment there is in residential real estate, nor where that investment comes from.”

The report itself, chaired by Liberal MP Kelly O’Dwyer, supports the push for greater transparency. That was the glaring problem with the present system, which should have worked quite well but hopelessly failed to measure and monitor foreign purchases.

The committee recommends retaining the current foreign investment framework applying to foreign purchases of residential real estate. The same existing restrictions on purchasing established dwellings would apply and foreign investment would be directed towards increasing Australia’s supply of new housing.

But the processes within the Foreign Investment Review Board have to change. There’s no point having a good framework without the capacity or willingness to enforce and monitor these rules. The Committee recommends putting in place “appropriate processes for the purpose of audit, compliance and enforcement of the foreign investment framework”.

This would be supported by a user-pays system. The Committee recommends introducing “a modest administrative fee to the current screening for all foreign purchases of residential real estate”. That doesn’t sound too restrictive or unreasonable, though admittedly that depends on the size of the fee.

More controversial will be the Committee’s recommendation that the government introduce civil penalties for breaches of the foreign investment framework. This includes penalties to the buyer themselves -- probably calculated as a share of the property value -- but also to any third party who knowingly assists a foreign investor to breach the framework. They also propose introducing a criminal penalty for third parties, including a maximum fine of $85,000

Given several real estate agents have set up Chinese based websites selling established property, that’s got to sting. It also runs the risk of appearing overly draconian. Ultimately it depends on the size of the penalties: if real estate agents can still make a fortune from foreign clients and the penalty is small, then they will treat the threat of fines as merely the cost of doing business.

Where would these fines go? The committee recommends that they be directed towards the Treasury’s Foreign Investment and Trade Policy Division to fund audit, compliance and enforcement activities.

The committee proposed that Australia’s foreign investment policy be amended to require temporary residents -- who are allowed to purchase established property on a temporary basis -- be required to sell that property within three months once it ceases to be their primary residence.

They also recommend that the federal government, combined with the states and territories, should establish a national register of land title transfer, which record the citizenship and residency status of all buyers. From a transparency perspective, this is a clear step in the right direction.

For the system to work, the government needs to introduce a system that alerts them when temporary visas are about to expire. This can be cross-checked against the land register to identify owners that need to sell their properties when they leave the country.

This has, in the past, been the area where the FIRB monitoring has broken down. Temporary residents could come to Australia, buy established property, and then leave the country without any requirement that they sell that property.

The committee also recommends greater cross-department collaboration, encouraging the Treasury’s Foreign Investment and Trade Policy Division to make greater use of AUSTRAC databases, as well as those of other federal and state government databases.

Finally, the committee recommended that foreign purchases of real estate be considered as an amendment in the statutory review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

On balance, these are a very solid list of recommendations, much better than I thought they’d be when the Terms of Reference were announced (Counting the cost of foreign investment in Australia, March 24).

At its core it addresses our current ignorance: the fact that we don’t know how much foreign investment is actually taking place. Critics may play the race card or believe that the issue reflects mass public hysteria -- I won’t discount the possibility that this is the case for some people -- but there are also solid economic arguments against unfettered foreign investment.

The benefits of foreign investment -- when directed towards new supply -- have been greater construction activity and employment. I’m certainly in favour of that, but we also shouldn’t ignore the potential costs.

Higher property prices might seem great at first glance but they increase the costs to businesses and operate as a genuine barrier to entry for potential businesses. When foreign investors can purchase established properties they actively add to those business costs, while also increasing the debt burden to existing Australians and pricing other Australians out of the market.

In my view, the biggest cost associated with foreign investment isn’t so much the direct house price response, but the greater vulnerability to economic shocks. Widespread foreign investment leads to a more volatile housing market -- greater gains during upswings but also greater losses during the downturns. I’m also not convinced that increasing our exposure to China is necessarily a good thing, particularly given we already rely on them so much to buy our exports.

We will have to wait and see whether these reforms are embraced by the federal government. They should be a slam-dunk from a political perspective, given the ongoing concern among the public, but we can’t discount what a hostile Senate might do.

The ongoing success of these reforms, if implemented, will be tied to the size of the civil and criminal penalties. The reforms seem logical and fill many of the gaps apparent in the existing framework. The civil and criminal penalties seem to be the most controversial and uncertain aspect and the third-party penalties appear certain to be the most hotly contested aspect of the recommendations.

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