Pitfalls piling up for investments in Australian housing
REAL estate investment in Australia is about to become a lot more expensive. The state government in Sydney is set to become the latest to impose foreign investor surcharges on stamp duty and land tax on residential properties later this week. Earlier this year, the state government in Melbourne raised the surcharge for foreign buyers of residential property from 3 per cent to 7 per cent from July 1. The Queensland government in Brisbane has also imposed a 3 per cent transfer duty surcharge.
The official reason being given for the new taxes is that the state administrations are trying to ensure that the local buyers are not priced out of the markets. To be sure, there is some basis for this claim. Developers sometimes market their projects overseas without even bothering to interest locals. But it must also be noted that the foreign buyer is also seen as a cash cow to be milked for all its worth to fill the treasury coffers at no political cost. Indeed, foreign investment in Australian real estate represents almost 45 per cent of all foreign investment in the country. A record A$60.7 billion (S$60.9 billion) poured into Australian real estate in 2015 and it represents about 25 per cent of all property development in the country.
In Sydney, the additional levies are estimated to generate A$262 million in the next financial year and more than A$1 billion over the next four years. The Melbourne authorities think that the new taxes will deliver an additional A$486 million in revenue over the next four years. No wonder these state governments all think that they are on to a good thing. After all, inner city apartments in Sydney and Melbourne are, by far, the most sought-after investment by foreign investors. Many of these developments are often sold off the plan at glitzy sales campaigns overseas where developers think that potential buyers are waiting with open wallets.
Why does this matter to Singapore? Well, Singaporeans spent more than A$4 billion in 2014 to buy residential property in Australia. That makes Singapore the third biggest investor in real estate after China and the US. More significantly, the 2014 figure, the latest complete set available, was more than double the 2013 total. The Chinese poured more than A$12 billion into investment properties in 2014. And again it was almost double the real estate investments in 2013. Americans invested A$6 billion in 2014. The relative size of Singapore's population against China and the US shows all too well the depth of interest in Australian property. Even Britain and New Zealand, traditional source nations for investment and immigrants to Australia, ranked well below Singapore.
Why the demand for property in Australia? For the Chinese, Australia is seen as a country with an effective legal system and ownership laws - therefore a safe place to park their money. Thus, property is simply a store of value; which is why anecdotal evidence suggests that a lot of these homes remain unoccupied for years on end. For the others, it is seen as a way to garner high returns. Australian residential investments returned an average 9.8 per cent yearly in the last 20 years. But much could change in the coming months. Beijing is cracking down on large capital outflows and that is driving down demand. Australian banks have tightened lending to potential buyers based overseas. The Australian Tax Office plans to impose a 10 per cent withholding tax on property worth more than A$2 million. The state government has already imposed rules on proof of residency when buying in Sydney. And as if all this were not enough, there is now a case where an enterprising person has taken possession of a million-dollar vacant home in Sydney. As a news report put it: "Long term and continuous use of a property by an individual can, in some circumstances, cancel out rights of the real owner." Singaporean investors are well-advised to watch for pitfalls.
READ MORE: Australia taxes foreign home buyers as affordability bites
