In the major capital cities on Australia’s east coast, property prices continue to rise rapidly, and in response, one government has increased the foreign buyer tax.
The New South Wales government recently announced that the foreign buyer tax that currently applies to foreign home buyers will soon double. In addition, the investor stamp duty will rise by 8% and annual land tax will rise around 2 percent with stamp duty concessions being limited. Real estate agents who work with international buyers have stated that due to these changes, the number of Chinese buyers in the market have been vastly affected.
Chinese property investors are turning their backs on Australia as a series of measures designed to cool one of the world’s hottest real estate markets targets foreign buyers. Investing into the Sydney property market was relatively easy for international buyers, but the recent increase has impacted their desire to invest. A Sydney-based sales consultant said the changes sent a clear signal to his overseas investors they were not welcome.
Does the Foreign Buyer Tax Help Australian Buyers?
The foreign buyer tax was introduced in an attempt to slow down the growth in property prices so that Australians can buy homes in the city in which they live. Sydney house prices have risen 106 per cent since 2009, with Melbourne not that far behind, up 89 per cent.
But some critics say that the foreign buyer tax has no impact on the property market or escalating house prices.
Detailed analysis from the big broking house Credit Suisse has found that despite the hurdles to Chinese investment in Australian property constantly being raised, it is still seen as good value. Perhaps the starkest statistic from the perspective of value is the fact that the median price for a two-bedroom apartment in Shanghai is around $900,000, which is 25 per cent more than the median apartment price in Sydney.
Then there is the issue of rental yield. In Shanghai, rental yields average around 1.5 per cent, half what a landlord of an equivalent property in Sydney would get.
“Yes, our property is expensive when we compare it to our own history, but it is cheap when compared to Chinese property,” Credit Suisse strategist Hasan Tevfik noted.
Richardson & Wrench Mosman director Robert Simeon said the measures the state budget was set to introduce would not be significant alone. However combined with the federal budget’s limitation on foreign buyers to 50 per cent of new developments, and a vacancy tax, he warned many projects would be shelved and prices could decline.
“Developers can’t usually get funding without 75 per cent of apartments being sold off the plan,” he said. “It totally defies economic logic.”
Another measure from the federal budget hits foreign buyers who leave their properties empty. Those who don’t have a tenant in their property, or live in it themselves for a lengthy period of time, will be expected to pay an annual charge equal to their foreign investment application fee.The intention is to encourage foreign owners to rent out their investment properties when they’re not living in them. Critics of foreign investment have long warned about “absentee” property owners leaving floors of empty apartments in inner-city hubs and adding pressure to already tight rental markets. This could take some pressure off Sydney’s tenants, who have experienced rents jump to more than $500 a week for houses and apartments in the first quarter of 2017, according to the latest Domain Group data.
The Victorian government also announced penalties for foreign buyers who keep investment properties empty.
Foreign and temporary tax residents will also be denied any access to capital gains tax exemptions. The CGT withholding tax rate for foreign tax residents is being lifted from 10 per cent to 12.5 per cent and the CGT withholding threshold for foreign tax residents is being dropped from $2 million to $750,000.
This means that any time a property worth $750,000 or more is sold, the seller will need to provide a certificate noting they are a resident, or they will face some of their profits being withheld.
However, many believe the property market will only see little impact. Some state that the domestic sales are enough to continue to feed the market and international buyers interested in Sydney and Melbourne property have deep enough pockets to not be affected by increased taxes. Chief executive of Chinese developer Shanghai United, Yangdong Xu, said they intend to spend $1 billion in Australia in the next decade, having already spent $600 million in the last two years.
While their focus is on building for local buyers, he said offshore investors found Sydney relatively inexpensive compared to other global cities, and it compared favourably as the income to price ratio in Shanghai was one to 40 or 50, compared to one to eight or 10 in Sydney.
Other developers say domestic sales are robust enough to fill any gap left by foreigners, especially given extra government help for first-time home buyers.
“We are OK with this, our business model isn’t relying on massive investment from overseas purchasers and for first home buyers, it’s the right decision,” said Jay Carter, sales and marketing director at Poly Australia, a subsidiary of Chinese state-controlled Poly Real Estate Group Co.
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