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Foreign Investment: Federal Budget 2017 Overview

In the three months to September, foreign nationals accounted for 11% of residential property purchases in New South Wales. This may not seem like a lot, but for those feeling frustrated with the property market, it’s very easy to blame the deep pockets of foreign investors. However, it’s not foreign investment in residential properties that’s locking first home buyers in Australia out of the property market. Rather, the bigger issue seems that many properties purchased by foreign investors in Australia are being left empty.

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The vacant property problem

A study by the University of New South Wales’ City Futures Research Centre revealed that there were approximately 90,000 unoccupied apartments and houses throughout Sydney, largely concentrated in some of the most exclusive neighbourhoods, like Kirribilli and Darlinghurst. Prosper Australia, a non-government organisation that looks into land, taxation and economical issues, produced a similar report in 2015 that showed some 20% of investor-owned homes - more than 80,000 properties - were unoccupied.

foreign-investors

It appears that these “ghost” properties aren’t left vacant because the owners are unable to find someone willing to rent them. Rather, it is because it is often more profitable, through negative gearing, for investors to under utilise their properties. In fact, there is a greater concentration of vacant properties in highly sought after metropolitan suburbs than in suburbs on the outermost fringes of cities.

Maintaining a rental property can involve a lot of time, effort and commitment, but through taxes and government subsidies, investors can earn just as much - if not more - on a rental property by leaving it vacant as they would if they had a rental income stream coming from a tenant.

The issue here, then, is that while these properties remain empty, hopeful first home buyers - and even renters - in Australia are robbed of hundreds of thousands (some estimates put the number of empty dwellings throughout Australia at around 300,000) of potential opportunities to break into the housing market.

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The solution?

In an effort to reduce the amount of vacant properties, the government is implementing a ‘ghost house tax.’

The ghost house tax is as high as $5,000 per property and will only apply to foreign investors who leave properties that they own vacant and it will also be imposed on foreign buyers. The intended outcome of the new tax is to create housing availability and, by extension, reduce the housing affordability problem in Australia.

sydney-melbourne-house-prices

Not only will it hopefully fill properties, the revenue raised by this measure will be put towards the government's new schemes for housing affordability, also contained within the 2017 Budget. It is expected that this tax should raise approximately $80million over 4 years.

A potential downside to this new ghost house tax is that it may reduce the amount of foreign investors who are willing to invest in property in Australia, due to the fact that they have to cough up the potential $5000. Also, it is likely not just foreign investors who are leaving properties vacant, so just how much of an impact this tax will have on the number of empty dwellings throughout Australia is uncertain.

Foreign property owners feel the sting

In addition to the ghost house tax, the Federal Government is bringing forward an initiative to prevent foreign investors from purchasing more than half of the apartments or houses in any new property developments, in order to further assist Australian buyers as they endeavour to enter the housing market.

And, foreign property owners will also have to pay the capital gains tax when they sell their primary residence.

Data courtesy of CoreLogic.

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Tags: investing, investment property, federal budget 2017, first home buyer, vacant possession, off the plan

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