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Why the big drop in Chinese offshore?

John McGrath
Thursday, March 14, 2019

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The latest annual report from the FIRB reveals a marked decline in foreign demand for Australian residential real estate. It fell noticeably last year – in fact, it more than halved from $30 billion worth of approvals in 2016-17 to just $12.5 billion in 2017-18.

So why the big drop? The FIRB report outlines the reasons: “State taxes and foreign resident stamp duty increases, foreign investment application fees, tightening domestic credit and increased restrictions on capital transfers in home countries.”

China was our biggest foreign real estate investor once again, although the value of Chinese residential and commercial purchases dropped from $15.3 billion in 2016-17 to $12.7 billion in 2017-18.

Mainland Chinese residential buyers, particularly investors, have disappeared for two main reasons. The restrictions in cash outflows from China, making it harder to transfer an appropriate deposit to Australia. Secondly, the relatively recent state taxes that have warned off potential buyers.

The taxes were implemented erroneously, in my opinion, based on the false assumption that overseas buyers were driving up local prices out of reach of Australian residents.

I think it’s now clear that wasn’t the case and hopefully these will change soon.  In a global economy, thriving countries need to be attracting international investment, not repelling it. 

The FIRB report noted that $114 million in foreign investment application fees was collected in 2017-18. The latest figures released by the NSW Government on its foreign stamp duty surcharge showed $154 million was collected in 2016-17 (Chinese buyers paid $126 million of it).

My question is: are these fees and taxes really worth what they’re costing us in lost investment potential?

History shows the bulk of individual foreign residential property purchases are under $1 million. So, let’s say a foreign investor wants to purchase an $800,000 apartment in NSW. Here are the fees he’s up for:

-        $5,600 just to apply for FIRB approval to make the purchase

-        An 8% state stamp duty surcharge of $64,000

-        Regular stamp duty of $31,490

That’s more than $100,000 in taxes. Doesn’t really convey a warm welcome, does it?

There were 10,036 approvals for residential property purchases in 2017-18 compared to 13,198 in 2016-17.

Victoria was by far the most popular state with foreigners, with 46% of approvals for residential property purchases, followed by NSW at 23% and Queensland at 17%.

Meantime, Australian Chinese buyers are as active as ever. They’re now entrenched like anyone else as a local buyer and they are astute property purchasers.

Many Chinese families who settled in established Chinese communities at first are now upgrading to premium suburbs as their wealth grows.

Davey Hong, who heads up McGrath’s China Desk, tells me that local Chinese and new migrants are still keen to participate in the Great Australian Dream of home ownership.

Davey says: “We are seeing less interest from Chinese investors but local Chinese and new migrants’ appetite is still healthy for good residential property.”

Published: Thursday, March 14, 2019

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