Will taxing foreigners make housing more affordable?

The Victorian government is set to announce a 3% charge on home purchases by foreigners who aren't permanent residents, as well as a 0.5% land tax surcharge on absentee property owners that aren't permanent residents of Australia or citizens of Australia and New Zealand.

Victoria is following the lead of the Federal Government, which will begin charging fees of at least $5,000 on all applications by foreigners to purchase Australian property, while also increasing fines and penalties for illegal purchases of Australian homes.  

Governments are clearly taking advantage of perceptions that foreigners are pushing up already high housing prices – particularly in Sydney and Melbourne – enacting populist, revenue-raising moves. But will these changes have any impact on house prices?

The Federal Government's fees are minor, at least if you're a multimillionaire. And an extra 3% on the cost of your Australian bolt hole is quite bearable, too, especially if it helps you shift wealth out of your home country.

Yet it's not just rich foreigners purchasing Australian property. Recent data suggests foreigners are snapping up one in five new properties sold in NSW and Victoria. These changes are likely to have some impact.

If you reduce the demand for houses – which is what these new charges will do – all things being equal, lower prices should follow. Yet as the real estate industry has been quick to point out, high prices have the benefit of stimulating new supply over the longer term.

Still, I'm sceptical of the impact of these measures over the longer term.

Despite the penalties aimed at lawyers or real estate agents who help foreign buyers skirt the new regulations, smart advisers will probably find a few legitimate loopholes. After all, what's to stop foreigners from getting their relatives who are permanent residents to 'purchase' the property on their behalf?

More importantly, these changes will only impact foreign purchasers, which accounts for a small minority of residential real estate purchasers.

Interest rates, economic and wage growth, immigration levels and the pace of new dwelling construction are likely to have a far bigger impact on the housing market than these politically popular but low impact policies.

There's plenty of things our governments could do if they were truly serious about housing affordability. But many potential measures – like removing negative gearing, higher density housing and freeing up more land for development – would be deeply unpopular with voters.

Hitting up a few foreigners with a bigger tax bill is a far easier, populist option, giving the appearance of being serious about housing affordability with none of the substance.

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