It’s official: Chinese have abandoned Aussie property

The Foreign Investment Review Board (FIRB) has released its 2019-20 Annual Report, which shows a decline in the number foreign residential real estate investment transactions but a rise in values across established and new dwellings:

Less foreign real estate transactions in 2019-20, but higher values.

The number of foreign investment approvals for existing dwellings has fallen from a peak of 5,876 in 2015-16 to 1,101 in 2019-20. By contrast, the value of existing dwellings approved fell from a peak of $7.3 billion in 2015-16 to a trough of $1.7 billion in 2018-19, before rebounding to $4.5 billion in 2019-20.

In a similar vein, the number of foreign investment approvals for new dwellings has collapsed from a peak of 26,253 in 2015-16 to 3,899 in 2019-20. By contrast, the value of new dwellings approved collapsed from $57.6 billion in 2015-16 to a trough of $4.8 billion in 2018-19, before rebounding slightly to $4.9 billion in 2019-20.

As shown in the next table, Victoria (read Melbourne) remains the foreign investment hot spot for residential real estate:

Victoria the hotspot for foreign investment.

FIRB does not provide a break-down of residential real estate investment by country. However, overall real estate investment from China has tanked from $31.9 billion in 2015-16 to only $7.1 billion in 2019-20.

FIRB also outlines the following residential real estate compliance activities:

During the period, 746 cases were identified for investigation, down from 1,220 cases in 2018-19. Of these, 620 investigations were completed, compared to 1,068 in 2018-19, which identified 259 properties that were in breach of Australia’s foreign investment rules, down from 600 in 2018-19 (see Table 4.1)…

As outlined in Table 4.2, divestment (27.0 per cent), retrospective approval during government consideration (23.9 per cent) and change of conditions (22.0 per cent) are the most frequent outcomes…

There are two levels of infringement notices which impose different financial penalties on a foreign person. A Tier 1 infringement notice may be issued where a foreign person notifies of a breach before an infringement notice is issued, while in cases where the ATO identifies a breach as a result of compliance activity, a Tier 2 infringement notice may be issued. Table 4.5 provides information on infringement notice outcomes…

As you can see, there were only 70 divestments (forced or voluntary sales) in the 2019-20 year, whereby the seller is allowed to keep any capital gain.

Moreover, there were only 176 fines issued in 2019-20 averaging only $7,409 – basically a rounding error and hardly a deterrent tor breaking the FIRB rules.

The ATO’s lack of enforcement comes despite the legislation explicitly stating that a foreign national found having purchased an established dwelling without prior Foreign Investment Review Board (FIRB) approval, or having failed to dispose of a property once they have left Australia (in the case of temporary residents), faces the following penalties:

• Criminal penalty of $135,000 or 3 years imprisonment; or
• Civil penalty of the capital gain made on divestment of the property or 25% of the purchase price or market value of the property (whichever is greater).

Third parties that knowingly assist foreigners to illegally purchase Australian homes are also supposed to face penalties of $45,000 individually or $225,000 for a company, under the legislation.

This data is more confirmation that the FIRB property rules are a charade, and comes on top of the Coalition Government shelving the promised implementation of anti-money laundering rules for real estate gate-keepers, despite warnings from the global regulator – the Paris-based Financial Action Taskforce – that Australian homes are a haven for laundered funds, and similar warnings from AUSTRAC.

Clearly, the Australian Government has little interest in actually policing illegal foreign buyers of real estate.

The only upside is that Chinese capital controls and the breakdown of diplomatic relations appear to have done the job for us.