Well-placed sources in the Australian mortgage and property space have revealed the magnitude of the systemic issue of foreign nationals buying existing property in Australia.
A mortgage broker that targets Chinese property investors has called on the federal government to police the purchase of existing property by foreign buyers.
Ausin Group argues that since 2006, the Foreign Investment Review Board (FIRB) has not prosecuted a single overseas buyer for purchasing a second-hand dwelling.
“The FIRB’s policy stipulates that overseas buyers can only buy new properties or newly-completed dwellings,” Ausin Group managing director Joseph Zaja said.
“The government needs to start policing what is happening at auctions across Australia.
“Auction clearance rates have been at record highs in Sydney and Melbourne for well over a year, which has been driven in part by foreigners purchasing second-hand dwellings,” he said. “This needs to stop.”
Mr Zaja believes overseas investors purchasing existing properties is driving up house prices, adding that he has seen the sheer scale of the problem himself at auctions across the country.
“Foreign passports are being registered at auctions without being checked for FIRB approval,” he said. “Local buyers are being gazumped and priced out of the market.”
Ausin Group, which has offices in Beijing and Shanghai, confirmed that clients are starting to reject new housing stock as “the word is now out” that Australia’s FIRB rules are a joke.
“Their friends and family are purchasing second-hand homes with no barriers to entry and they too are now moving onto this bandwagon,” Mr Zaja said.
“The government needs to act now,” he said.
Ausin has already sold over 1500 new properties to overseas purchasers this financial year and expects this figure to continue to grow.
The group’s brokerage, Ausin Finance, expects to write half a billion dollars’ worth of home loans to Chinese buyers by the end of the financial year.
In a 119-page report tabled in parliament last week, the House of Representatives Standing Committee on Economics made 12 recommendations that could see a regulatory overhaul of enforcement and penalties to curb foreign buyers, including a national register and greater surveillance of the funding sources of certain foreign nationals.
The report also recommended a mandatory application fee of $1500 on all foreign property buyers.
The head of China’s biggest website for nationals looking to purchase overseas property said the fee could curb demand.
"I am worried about the proposal to tax $1500 from overseas homebuyers every time they make an application to purchase a property - even if through no fault of their own they fail to buy it (for example, if another bidder wins it),” Juwai.com co-CEO Simon Henry said.
"The proposed $1500 fee could curtail foreign investment in Australia,” Mr Henry said, adding that “the devil will be in the details”.
While the report laid out strict new rules for foreign homebuyers, it concluded that foreign investment in Australian real estate is positive for the economy.
It also stated that foreign buyers are not the cause of rising property prices.
"More likely, prices are high due to low interest rates, supply constraints and negative gearing,” Mr Henry said.
"Treasurer Joe Hockey now has to decide if he wants to ask cabinet to tighten regulation of offshore investment in real estate,” he said.
“Nothing will change unless the government enacts the changes with new rules or legislation.
"With the market slowing down, this is an awkward time to meddle with something that has been so positive."
Foreign investment in the UK
Concerns over foreign investment and undersupply are not unique to Australia.
The two issues – which have sparked ongoing debate among the local population – are also an issue in the UK.
Speaking at a media briefing in Sydney last week, Credit Suisse senior adviser, Robert Parker, said foreign investment is now a “huge issue” in London.
“A number of surveys in central London have looked at new property developments in certain London boroughs and found that the majority of those apartments were not occupied,” Mr Parker said.
Whether it is wealthy Russians or wealthy Greeks or whatever, it doesn’t matter what nationality they are, they are all coming in and buying this as an investment and leaving it unoccupied,” he said.
“I think you have a similar issue here.”
The UK has imposed a stamp duty, or transaction tax, that has increased substantially for foreign buyers, Mr Parker said.
In Australia, as the new rules on foreign investors await government approval, the committee report highlighted another growing concern - sources of financing.
The report raised fears of a strong possibility that shadow banking may be involved in some cases.
“The extent of this issue is uncertain but it would be prudent to ensure that any transactions involving an overseas purchase of an Australian property can be thoroughly investigated if considered suspicious,” the committee recommended.
Mr Parker of Credit Suisse, who is based in Europe, explained shadow banking in its simplest form.
“Let’s say I’m a wealthy Chinese individual and I walk into an ICBC branch in Beijing and say ‘listen, I’ve got a million renminbi that I want to put on deposit for six months’,” he explained.
“The bank will tell you that if you put it with them they will give you half a per cent.
“But the salesman will say ‘I have this fantastic mutual fund, and if you buy units in this fantastic mutual fund, which invests money with a very safe Chinese company, we will pay you 10 per cent’.
“You go back in six months’ time and they say ‘sorry, the company has gone bust’.
“What they then say is that the Chinese government has instructed them that you will get your money back, but the fund is now restructured so what was a six-month instrument is now a 20-year instrument.
The important point, Mr Parker noted, is that China has clamped down on shadow banking and eased lending to the conventional banks.