This article has been republished from the Your Investment Property digital magazine.
Canada started the year with a new policy prohibiting foreign investors from purchasing residential property over the next two years, spurring talk of whether Australia should consider a similar move.
The new Canadian law was passed due to the unprecedented spike in home prices since the start of the pandemic, which many policymakers blamed on foreign investors.
In a report from CNN, Canadian Prime Minister Justin Trudeau said the desirability of the Canadian housing market has attracted “profiteers, wealthy corporations, and foreign investors.”
“This is leading to a real problem of underused and vacant housing, rampant speculation, and skyrocketing prices. Homes are for people, not investors,” he said.
Canada and Australia experienced the same trajectory in home prices since the pandemic started. Both are experiencing a slowdown in price growth, on the back of central banks hiking rates and potential buyers feeling the heat of increasing costs of living.
In fact, average home prices in Canada have already fallen steadily since the peak in February — a similar story to Australia’s current slowdown.
Still, despite the overall downturn across the housing markets in Australia, overall dwelling values remained well above pre-COVID levels.
Across capital cities, dwelling values remained 11.7% above their level in March 2020. Meanwhile, regional areas recorded a 32.2% growth in values compared to the same period.
Should Australia consider banning foreign investors?
PRD Real Estate chief economist Dr Diaswati Mardiasmo said a ban for foreign buyers can potentially increase the supply of residential property.
“Around 2.5% to 4% of Australian residential property being foreign-owned — with the introduction of a ‘foreign embargo’ this would heavily increase the supply of residential property if all current foreign investors were forced to sell, or at the least would decrease the demand of property,” she told Your Investment Property magazine.
This would, however, heavily impact the rental market given that most of these foreign-owned properties are for investment purposes. This could reduce the number of rental properties, tighten vacancies, and boost rent prices.
“If this strategy were to be implemented, it would need to be backed by government subsidies as well as other strategies targeting social affordable housing, such as a build-to-rent model,” Dr Mardiasmo said.
Another impact is on off-the-plan projects, which require a certain percentage to be pre-sold before being approved for finance and having the approval to build.
“More often than not a big chunk of these pre-sales are foreign buyers, who are happy to purchase sight unseen as it’s for investment only — if a significant enough number of foreign buyers drop off, there is the chance of the required pre-sold percentage not being reached, and the project doesn’t go ahead,” Dr Mardiasmo said.
“Hence the planned supply, for both local buyers — owner occupiers and investors — and renters do not go ahead,” she said.
InvestorKit head of research Arjun Paliwal said a ban on foreign investment would be misguided and would not make any meaningful difference to housing affordability.
“In Australia, we already make foreign buying of property difficult through regulations and expensive through surcharges and taxes — adding a ban would do little to nothing for greater housing affordability,” he told Your Investment Property magazine.
Data from the Foreign Investment Review Board (FIRB) showed that from 1 July 2020 to 30 June 2021, 5,310 residential real estate purchase transactions had a level of foreign ownership with a total value of $4.2bn.
According to CoreLogic, more than 550,000 properties were sold during the period — this means that the share of purchases from foreign buyers is around 1%.
“New dwellings represented 68.6% of purchase transactions, followed by 18% for vacant land, and 13.4% for established dwellings in 2020‑21. This means foreign buyers are supporting housing supply creation,” Mr Paliwal said.
How foreign property buyers are regulated?
According to PRD Real Estate, FIRB monitors or categorises foreign buyers as those without Australian nationality or permanent residence.
On a national level, all foreign buyers must apply to the FIRB for approval to acquire an investment.
Foreign properties are taxed for capital gains in full, no discounts are available to foreign buyers even for assets acquired post-2012.
In terms of limitations, foreigners can buy new buildings or vacant land, with the exception being value-adding knockdown rebuilds. Non-resident mortgages are also a large consideration.
What can be done instead to increase supply for local buyers?
Dr Mardiasmo said innovative approaches to housing supply would be an answer as opposed to limiting who can purchase.
“This involves an extensive process of deregulating construction to allow for ‘granny flats’ in all states to increase rental stock, incentivise construction, and further investment in build-to-rent and social affordable housing,” she said.
The ‘Go tall, not sprawl’ strategy would also be necessary, especially within 10 kilometres of a city — tall apartment complexes are able to accompany a larger amount of people per sqm than a single-story dwelling.
“The issue with this strategy is that it is short term and relatively short-sighted, as cities will naturally expand from its inner to the middle to its outer rings as supply dwindles as seen in other cities such as New York and London,” Dr Mardiasmo said.
