Finance Property Foreign investor crackdown to deliver $455 million windfall – but not without costs

Foreign investor crackdown to deliver $455 million windfall – but not without costs

Jim Chalmers inflation
Dr Chalmers said there was only so much the government can do to offer cost of living relief. Photo: AAP
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Fees paid by foreign investors will double under a new federal government effort to ease Australia’s housing crisis, but experts warned the benefits would be marginal and come with costs.

Treasurer Jim Chalmers unveiled a $455 million crackdown on foreign investors on Friday, saying the funds would help deliver Labor’s housing agenda.

“Tackling housing affordability and helping more Australians into home ownership is a significant challenge and it’s one this government takes seriously,” Mr Chalmers said in a joint release with housing minister Julie Collins.

But economists and academics said reducing foreign investment would only slightly lower property prices, arguing reforms to local tax breaks are more important.

And others were more critical, warning higher foreign investment fees would deliver wider economic costs because local businesses could suffer.

“The measure smacks of a crass cash grab,” said Steven Hamilton, assistant professor of economics at George Washington University.

Investor crackdown

Foreign investors bought 1176 Australian residential properties worth just under $1 billion in 2018-19, according to the Foreign Investment Review Board. (The total value of Australia’s residential market was about $6.9 trillion at that time.)

Investors pay fees starting at about $6600 and rising to a maximum of about $522,000 annually.

Under Labor’s reforms – which will come into force from July 29 –  all of these fees will double, and so will fines for breaking investment rules.

The plan will apply to all forms of foreign investment, not just property.

Labor said it will add $455 million to public coffers over four years, while also helping to ease Australia’s housing affordability crisis by reducing foreign demand.

But Angela Jackson, lead economist at Impact Economics, said it will only play a small role in fixing affordability.

Ultimately, she said the crackdown is no substitute for local reforms such as changes to capital gains tax discounts – a policy backed by many other economists as well as the OECD.

“The extent to which foreign investors may be leaving properties empty and using them as a vehicle to store wealth is one factor that’s underpinning higher house prices,” Dr Jackson said.

“That said, if we look at the past 12 months, we had a huge drop in overseas investment to the lowest level in 15 years, and yet we saw house prices growing at record levels.”

Associate professor Dallas Rogers, head of urbanism at the University of Sydney, said higher foreign investor fees would have the largest effect in areas like inner-city Sydney.

Overseas buyers tend to purchase more properties in these areas and so reduce supply there, he said.

“This won’t make housing more affordable, but that doesn’t mean it’s not a good thing within the context of a suite of policies,” Dr Rogers said of Labor’s crackdown.

‘Economic impacts’

Dr Jackson said one issue is the plan applies to all foreign investment, meaning it could hurt local firms and have “broader economic impacts”.

“Foreign investment is important for lifting productivity in Australia,” she said.

Dr Hamilton was more critical, saying although it was difficult to say exactly how much foreign investment would be lost it was clear a crackdown would deter it.

Arguing against the reforms, he said the revenue would be “trivial” and Labor should instead be encouraging investment to lift living standards.

“We need our government to provide leadership on this, to lean against our counterproductive tendency to look inwards as a nation,” he said.

The government said money raised from the investor fee hike would be used to help pay for its shared equity housing scheme promised in May.

Local reform needed

Dr Rogers and Dr Jackson said there are more useful reforms than a crackdown on foreign investors to help improve housing affordability.

They said tax concessions such as capital gains discounts helped push up property prices.

“We need to be looking at all the distortions in the market underpinning that – the taxation system is one of the big ones,” Dr Jackson explained.

On Friday the OECD backed this view in a report that criticised capital gains tax discounts in Australia, arguing these policies had made inequality worse.

Currently, capital gains tax isn’t applied to principle residences, while the tax paid on sales of investment homes is discounted by 50 per cent.

Principle residence tax breaks cost Australia $64 billion in 2021, the OECD said.

“In Australia, the bottom half of the income distribution receives around 13 per cent of the total tax relief for capital gains on the main residence, while the top decile receives 37 per cent,” it said, citing local research.

The OECD called for a cap on these CGT discounts.

Dr Jackson said that suggestion should feed into negotiations over Labor’s expected national housing strategy.