foreign investment

Chinese investors are often blamed for Australia’s escalating house prices but a number of factors might mean the demand will drop off in coming years. A recently released report found investment in residential real estate by the Chinese is slowing. As the gap in rental yields between the two countries closes and house prices increase, Australian residential real estate is beginning to look less attractive. The lifting of restrictions on Chinese urban residential property ownership and personal investment monetary restrictions may also play a part. [Article first published on The Conversation, May 1, 2017]

China has A$1.34 million high net worth individuals and 568 billionaires. Their combined net worth is equivalent to Australia’s GDP.

Many Chinese investors have access to both legitimate and hidden income and wealth and seek to invest both in overseas real estate. This is at a time when China is in the grip of its own housing affordability crisis.

Why Australia has seemed attractive

In 2015, Chinese investors ploughed approximately A$6.8 billion into Australian commercial and residential real estate. Current Foreign Investment Review Board (FIRB) policies channel incoming real estate investment funding into new dwellings, creating additional jobs in construction and supporting economic growth.

Though temporary Australian residents may be required to sell older residential property when they leave Australia, many foreign nationals are able to retain, rent out, sell or live in newly constructed dwellings. This is a major draw card for Chinese investment in new residential buildings.

Other pull factors include Australia’s stable financial institutions, compared to China,, well regulated land title system, buoyant real estate market, high capital gains rates in major cities and lower deposit requirements.

Australia’s Foreign Investment Review Board (FIRB) may keep an eye on these factors when considering new foreign investment in the housing market, but it struggles to counteract the push effect of Chinese property law restrictions and investor needs.

Factors in China at play

Conditions in China’s economy and regulatory environment also push Chinese investors to focus on overseas markets. The depreciation of the Chinese currency is a significant force. As this currency is devalued, Chinese investors reconsider what and where they can afford to purchase.

Australia’s rental yields of 2-3% in major cities are twice that of China’s. Legislative changes to residential property investment in China also makes Australia look appealing.

China has a dual property ownership system that segregates rural and urban land ownership systems. Rural cooperatives own the rural land ownership rights. Cooperative members can only sell to other members of the same rural cooperative.

This limits competition for rural land and keeps rural land prices low. But it also means rural land is an unattractive investment choice for Chinese.

Urban land, on the other hand, remains state owned with a 70 year lease system to housing owners. The system limits ownership of urban residential buildings to people with urban registration or those that have lived in and paid taxes in the same urban area for five consecutive years. This situation stops many Chinese from being able to purchase urban residential property.

Between 2011 and 2015, those who did have the appropriate registration were limited to a maximum purchase of two residential properties within their urban area – one property to live in and one as an investment. This limitation still applies in Beijing.

The limitation was put in place to counteract major housing affordability discontent as an increasing number of people were locked out of the housing market. This problem is exacerbated by the 30% deposit requirement on residential real estate purchases. This combination of factors forces many Chinese investors into purchasing properties on China’s black market where ownership is uncertain or seek investment opportunities outside China.

The Chinese State Administration of Foreign Exchange introduced new regulations to tighten the flow of capital from China in November 2016. This agency is tasked with the approval of outgoing overseas payments of more than US$5 million. However, most housing acquisitions in Australia fall below this limit.

From 2017, a new rule was introduced to limit the yearly foreign currency holding to US$50,000 for individual investors..

Larger Chinese development companies operating in Australia are known to sell individual residential units “off the plan” directly to Chinese property investors. Where this is the case, the developer has a vested interest in finding ways to circumvent the new limits on foreign currency holding in order to settle a contract. However, it will take time for developers to adjust their methods.

As house prices increase, rental yields generally fall. This is due to the large amount borrowed by investors compared to what they receive in rental income.

Though rent prices have increased significantly in Melbourne and Sydney, they have not kept pace with house prices. Rental yields have fallen in major cities.

In China, where the rental yield is 1-1.5%, some investors reconsider whether it is worth the effort of renting out their properties. Instead, they rely on the capital gain to create a profit while leaving the property vacant, preventing wear and tear to it. This practice has serious implications for the supply of rental properties in China.

As Australia continues to struggle with escalating house prices and decreasing rental yields, residential real estate investment becomes less attractive as a long term investment for Chinese investors. The reliance on capital gains may result in higher numbers of vacant properties in Australia, counteracting the FIRB’s intentions.

The restrictions enacted by Chinese regulators may slow the flow of money out of China in the short term. However, Chinese investors are likely to find ways to circumvent these restrictions. The lifting of restrictions on Chinese residential property ownership may refocus investment choice location to within China.

At first glance The Australian Greens’ announcement that they would abolish the negative gearing ₁  tax break, in a bid to increase government revenue through increased taxation and improve homelessness and housing affordability looks like the right move. I have, however a few questions about this.

Firstly it must be pointed out that the Australian Greens advocate that the new tax regime be “grandfathered” so that current negatively geared investors could continue to be so, but that no new investors would be entitled to this. Two sets of tax rules would apply side by side.

I wonder if borrowing to buy a property would be as attractive to a potential investor if s/he could not negatively gear. Presumably, The Greens do not advocate NO tax deduction on an income-generating investment but just to the point where it goes into the red.

I see from the policy document that their ruling would apply to all asset classes. At least here is some consistency.

Negative Gearing applies to non-property investments too

Negative gearing is usually only discussed in the context of property, but of course it applies to other investments too. At present one can borrow to buy shares, which will generate an income since they pay dividends. These dividends are subject to income taxation, in many cases offset by company tax already paid, in the form of imputation credits to the investor. Any shortfall in the income from the shares compared with the interest on the loan is tax deductible. With The Greens’ policy presumably this would only work up to the point that the investor is not going into the red.
One needs to look at why people borrow to invest in any asset. The sensible reason to do this is that the investor believes that the investment will rise in value, such that equity in the asset increases and the loan starts to look small by comparison. The investor can profit in two main ways:

1. With housing, as the value rises, the rent will also increase. Eventually the investor who was negatively geared could become “positively geared” and hence will pay tax to the government.

2. The investor who sees that s/he has made a paper profit can realise this gain, pay back the bank and pocket the profit minus Capital Gains Tax.

I cannot see that abolishing negative gearing will free up housing for non-investor home buyers nor that the tax gains for the government will be as significant as the Australian Greens believe. The abolishing of negative gearing would affect Australian investors, but it would not affect foreign investors who have borrowed from elsewhere. How would that be addressed?

Greens proposal fails to address land-costs – the biggest part of housing unaffordability

The Australian Greens advocate the use of prefabricated houses as a part solution to the terrible problem of homelessness in Australia. I don’t see anything in the document about the land required to put the prefab house on. Land-costs are the major component of housing in cities and these costs are more marked in areas which would be considered to be in a “good position.” The actual house is a relatively minor thing. If people had their own land, probably most would manage to erect some sort of shelter for themselves!

The Australian Greens, in deciding that “negative gearing” is to blame for Australia’s housing woes (and the complete evaporation of “the Australian dream”) fail to address the demand factor which is fundamental to the issue of unaffordable housing.

Where do the demands for Australia’s housing come from?

1. Australians as they reach adulthood tend to need housing apart from their parents . Only about half as many people die in Australia as are born here in any one year so there are roughly only half the number of houses available from that source as there are young Australian people looking for them. Thus there is a built-in shortfall because of our demography.

2. In addition to this, with high immigration, there are likely to be more migrants invited to Australia as business migrants, as skilled workers, students or for family reunion, than there are young Australians looking for their first home.

Penalised Australians would retreat and foreign investors advance

These two groups compete in the same housing market. If Australian would-be investors retreat from the housing investment market because the advantage of negative gearing is not there, I think as long as the total demand for housing does not slump then non-Australian investors will fill the gap left by locals and compete with local home-seekers. With large numbers of people needing housing and a short-fall in supply leading to very high purchase and rental prices, home-seekers and would-be renters will “fall through the cracks.”

Scott Ludlam says that 7,000 houses “for the homeless” will be supplied by 2020. That’s great, but people need housing now. There are 105,000 homeless people on any one night in Australia, according to Salvation Army figures and according to “Kids under cover”. Family breakdown is blamed for a lot of this but if housing were abundant, as it should be, a family breakdown would not result necessarily in homelessness.

Something needs to be done much more urgently about this problem, one which used to be practically unknown in Australia. We all, including The Greens, think we have a silver bullet for this problem but it seems clear that the demand side of the equation still needs to be lightened. This can be addressed easily and quickly at little or no cost. We should not be bringing in large numbers of skilled immigrants to compete against local young people for both housing and jobs. In maintaining very high immigration we are doing our young people a terrible disservice. Surely they deserve better than this?

NOTES

1. ↑  "Negative gearing is a form of financial leverage where an investor borrows money to invest and the gross income generated by the investment is less than the cost of owning and managing the investment, including depreciation and interest charged on the loan (but excluding capital repayments)." Source: en.wikipedia.org/wiki/Negative_gearing

See also: comment Opposed to $500 million Chinese theme park for NSW Central Coast (10/8/14) by the Australia First Party.

The Wyong Shire Council on NSW's Central Coast, has given its approval for the construction of the "Chappypie China Time" theme park to be built on 15.7 hectares of bushland at Warnervale. The bushland was sold to the Australia Chinese Theme Park Pty Ltd (ACTP) for $10 million. A short presentation by the Wyong Shire council to promote the Theme Park is shown below:

Evidently Australian entepreneurs are no longer capable of employing the Central Coast workforce to make goods and services to sell overseas. Instead, they can only offer jobs to serve affluent overseas guests in hotels, escort agencies or venues like the proposed "Chappypie China Time".

Other pages promoting "Chappypie China Time"

Chinese cultural theme park planned for Warnervale, video, poll (4/8/14, Newcastle Herald), , Chinese Theme Park for Warnervale - Office of the Mayor (Wyong Shire Council) (4/8/14, World News), Massive Chinese-style theme park proposed for Central Coast (4/8/14, ABC News).

Here is a story that explains this concept. Thanks to our contributor, Matthew Mitchell, for alerting us to this brilliantly simple analysis of our current problem, originally published as a comment here. It is a skilled, yet easy to understand, critique of economic theory that underpins todays political policy and the similar adverse impact of globalisation on places as far away from each other as Bangladesh and Australia.

(Original Source by John Kozy, Global Research, February 13, 2012: http://www.globalresearch.ca/abstractions-versus-the-real-world-economic-models-and-the-apologetics-of-greed/29270 Subtitles inserted by candobetter.net editor.

"Offshoring production to underdeveloped nations gives needy people jobs, increases their incomes, reduces poverty, and expands their nations’ GNPs. It also enables people in developed nations to purchase products produced offshore at lower prices enabling them to consume a wider range of things. As a result, everyone everywhere is better off."

Convinced? Most economists are, but it hasn’t worked that way. Everyone everywhere is not better off—as the whole world now knows. Why?

A factory in Bangladesh

In the latter part of the 80s or early part of the 90s, a large retailer (don’t remember which one) thought it would be a good idea to bring an employee of a factory in Bangladesh to America to see how the clothing the factory was producing was being marketed to Americans. So a Bengali woman was selected to represent her factory and brought to America. This idea didn’t work out well. The woman not only saw how the products were being marketed but how much they cost and she was infuriated. She knew what she and her coworkers were being paid, about two percent of the price of the garments. She did not remain silent and was quickly sent back to Bangladesh. Here is the gist of her story:

She said she and her coworkers were not financially better off after being hired by the factory. Yes, the wages were better than those that could have been earned before, but they weren’t much benefit. Why? Because when the paychecks began to arrive, the local landlords and vendors increased prices on everything, so just as before, all of their incomes went to pay for basic necessities. The landlords and vendors got the money; the workers were not better off, and those in the community who were not employed by the apparel factory were decidedly worse off. It fact, it quickly became apparent that the workers were working for nothing. They did the work; the landlords and vendors got the pay. But, of course, the country’s GNP was better, which is all that matters to economists who still claim that Bangladesh’s economy is improving.

And although Americans were able to buy the apparel more cheaply than they could have before the manufacturing was offshored, the American apparel workers who lost their jobs are decidedly not better off.

Two conclusions follow from this scenario: employment alone is not a sufficient condition for prosperity; full employment can exist in an enslaved society along side abject poverty, and an increasing GNP does not mean that an economy is getting better. Remember these the next time the unemployment rate and GNP numbers are cited. Those numbers mean nothing.

"The economic model described above just does not work, not in Bangladesh or anywhere else"

More than thirty years has now passed and nothing has changed in Bangladesh. Most Bengalis still continue to live on subsistence farming in rural villages. Despite a dramatic increase in foreign investment, a high poverty rate prevails. Observers attribute it to the rising prices of essentials. The economic model described above just does not work, not in Bangladesh or anywhere else. Explaining why reveals what’s wrong with economics and why current economic practices, which have not essentially improved mankind’s lot over the last two and a half centuries, won’t ever improve it.

Economists build models by what they call “abstraction.” But it’s really subtraction. They look at a real world situation and subtract from it the characteristics they deem unessential. The result is a bare bones description consisting of what economists deem economically essential. Everything that is discarded (not taken into consideration in the model) is called an “externality.” So the models only work when the externalities that were in effect before the models are implemented do not change afterward."

Australia, still a colony, has more supermarkets per capita than the US and nearly three times as many as the UK. [1]India, no longer a British colony, has no supermarket chains. What other country can claim this? Late last year Indian shopkeepers rioted successfully to stop foreign investment liberalisation and multinational supermarkets. Here is a mostly French-sourced article about how emerging powers are looking after their own industries, while the free-marketeers of the west sell the rest of us down the river. See also article about President Francois Holland's program to meet protectionism elsewhere with protectionism at home: ,"New French industry policy to moderate globalisation, Ministerial interview" A word of warning to vegetarians, the sacred cows of India are being sacrificed now to the mighty dollar.

(Adapted from a report entitled, "La pousee du protectionisme a l'echelle mondiale" by Pierre Monègier et Nicolas Ducrot on France2 Journal Televise, Thursday 7 June, 2000hrs.)

Presenter David Pujadas relating the phenomenon to the global financial crisis, says that according to an annual report from the European commission, world-wide, import duties are strongly increasing in number and in size. "This is particularly so among emerging powers, which have no qualms about protecting their markets."

India's export market

The France2 report centers round India.

We see film of a factory where millions of bright green gerkins are being processed. The message from Pierre Monègier is that

"This little gerkin has every chance of finishing up in [a french] plate. Indians produce more than
200,000 tonnes a year, but they don't like gerkins themselves.

The subtitle for this report, filmed in India, is, "You buy my products, I'll tax yours."

Reporter Pierre Monègier tells us,

"All these gerkins are therefore destined for export to France, the United States, Africa... 'Made in India' rolls out everywhere in the world, without obstacle. It's the same for livestock. In the Land of the Sacred Cow it would be sacreligious to put your fork in one, yet this year India will become first in the world in beef exports.

These performances signify a giant in the making. And that makes foreign investors want to have a share in the Indian cake, but in cooking, India doesn't really play fair," he concludes.

The camera shows us a French restaurant in India with a number of business-class looking male diners in the dining room and then moves to the kitchen, where the French proprietor tells us that he estimates that the cost of French products is multiplied by Indian import duties by three and a half to four times, generally. He says that it is the same for all French products - for wine, for fine delicatessen goods.

The reporter says that the result is that it is almost impossible to find french farm products in India. Furthermore, he says, one cannot rely on big supermarket chains in India to reduce the costs and put French products on their shelves.

There are no supermarkets in India

"In contrast to China and Brazil, India is still ferociously resisting foreign investment in the form of supermarket chains here. There are no supermarkets here. Carrefour [French supermarket chain] and Wal Mart have come to grief here. The government rejected them in order to protect thousands of grocery stores."

Proud democratic history of multinational supermarket chain failure in India

It began with an attempt to pass a law permitting 51% foreign investment-led multinational supermarket chains:

"NEW DELHI: Global chains like Walmart, Carrefour and Tesco may face problems in opening stores in over half of the 53 cities eligible for FDI in multi-brand retail.

The parties and alliances ruling in 11 major states with 28 cities, have strongly opposed the decision of the Central government to allow foreign direct investment (FDI) in multi-brand retail which is dominated by small traders" Source: "FDI in retail: Walmart, Carrefour, Tesco may face hurdles in 28 cities."

(25 November 2011):"Anger and indigation took over the Indian Parliament on Friday, after the Indian Minister for Industry and Commerce, Anand Sharma, announced the liberalisation of market policy towards foreign multinationals in India. The Opposition parties and the Trinamool Congress, key ally of the Congressional Party in the heart of the governing coalition (UPA), loudly protested against the green light given by New Delhi to big supermarket chains, permitting for the first time, foreign investment at 51% in the country in that sector.

...Direct foreign investment by groups like Wal-Mart and Carrefour to open a retail store would be subject to several conditions: minimum investment of 100 million dollars, of which 50 per cent must be devoted to housing infrastructure (chaine du froid etc), 30 per cent of produce would have to be sourced from small and medium sized businesses, and the stores would only be allowed to open in cities of more than one million inhabitants."
(Translation by Sheila Newman): Source: -la-polemique">25/11/2011 | Antoine Guinard ( Aujourd'hui l'Inde).

It ended with direct democracy:

Policy changes aiming at opening the market up to 51% foreign investment in the form of big multinational supermarket chains resulted on 2 December 2012 in one of those huge popular protests that India does so well and which constitute its chief form of real democracy.

"New Delhi backs down. ... Parliament was paralysed by the anger of the opposition. All the legal projects are in limbo today. Last Thursday the protests went to the streets, with one hundred thousand shopkeepers in a general strike. (Translation by Sheila Newman). Source:"India suspends the introduction of foreign supermarkets." (Article by Vanessa Dougnac.)

All translations in this article by Sheila Newman

NOTES

[1] Numbers of supermarkets in Australia per capita: http://www.stuartalexander.com.au/aust_grocery_market_woolworths_coles_wholesale.php

Illustration: collage of icons from housing and immigration industry sites and Steve Vizard who marketed the Bracks Melbourne Population Summit in 2002
Article by Jonathan Page

The laws regarding foreign ownership were relaxed recently,[1] ostensibly to allow temporary visa holders to buy properties at auction which was previously too difficult.

I was quite outraged after piece after piece appeared in the media with real estate agents bragging about Chinese buyers putting down their money over the phone without even seeing the properties, or purchasing several. These agents talk about how the wealthy investors are speculating on our real estate, and even letting the properties sit empty while waiting for their capital increase.

It is confusing to know exactly what is happening as only temporary visa holders are allowed to buy established properties, and then only a principal place of residence. But we hear of some of these people buying several.

I checked on the FIRB website and established that these practices are in contravention of the intentions of the foreign ownership guidelines. Foreign investors are not supposed to speculate, or engage in activity that would lead to housing stock shortage. It seems that Rudd's plan to keep the housing boom going (and possibly satisfy friends in China?!) has gone too far.

I penned a letter and sent it to all house of representatives members. I have had some good responses so I will wait to see with interest if anything happens.

We are losing prosperity when we sell out to wealthy overseas investors that we can't compete with. On top of the loss of prosperity we lose in many other ways with the associated population growth.

Jonathan Page

LINKS & NOTES BY CANDOBETTER EDITOR

Real estate speculation has been made possible on a level never previously conceived of due to the global Internet, through property dot coms like www.realestate.com.au and www.domaine.com.au, but also through very rapidly converging and mushrooming of industries and professions across government and private sector, so that we have, for instance, on the one hand, at the Federal level, the National Foreign Investment Review Board (NFIRB) positively facilitating foreign investment in local real estate and facilitating purchases by temporary immigrants for high turnover, and, on the local level, realtors touting local property internationally with the assistance of privatised migration agents and local solicitors, and at State level (where land use planning is controlled), organizations like the Property Council of Australia (APC), closely involved with determining government policy.

For more on this see "Bad Australian foreign investment laws marginalise Australians" or, for more detail, S.Newman for SPA VIC First Home Affordability Enquiry Submission, pp 16-20.