Housing taxes on foreigners will backfire on the economy

Henry Ergas, points to adverse implications of the attack on tax deductability for housing which would both to raise tax and lower demand competition for owner buyers.

Whether or not housing investors are to be hit with taxes, both the Commonwealth and the Victorian State Governments have discovered housing as a new source of taxation revenue.  In both cases the new tax slug is accompanied by claims that it is in accordance with the moral high ground.

For Victoria, Treasurer Tim Pallas claims that it restores fairness because foreigners did not contribute adequately to services and infrastructure.  This would come as a surprise to those within the industry. CIE estimated the average direct tax paid for a new infill-located house in Melbourne at $56,000 with a further $27,000 in “ambiguous taxes” like excessive infrastructure charges (plus a further $66,000 in generic taxes). On top of this, an average foreign buyer tax of around $20,000 a property is to be levied.

The Commonwealth is even more affronted that foreigners want to buy properties here and alongside a modest fee of $5,000 to $10,000 comes an array of penalties, including three years jail for foreigners who surreptitiously buy properties in Australia.

The populist rationale for the tax is the notion that (Chinese) investors are driving up prices and by their entry into the market are depriving locals of affordable housing.  The Prime Minister himself said, “I know from personal experience how tough it is to get into the housing market. I’m determined to crack down on any illegal ­activity that could be putting upward pressure on property prices. We want the rules enforced and we want Australians to be operating on a level playing field.”

So the policy ticks several boxes: it is a tax on the foreigner; it is justified by regular Australians creating conditions that make it attractive to invest here; it will reduce price pressures that prevent Australian residents from getting into the housing market.  What could go wrong and why haven’t other destinations for Chinese wealth (US, Europe) thought about doing the same thing?

First, a tax on foreigners is discriminatory – it is rather like a tax on exports of iron ore designed to give local manufacturers a boost at the expense of foreigners; the whole national reservation policy for gas is being played out again and it a policy that the ALP is likely to adopt.

As with other policies, a regulatory policy favouring domestic buyers backfires.  At best, if the supply is fixed, it reduces the price current owners can get for their assets, partly expropriating their property values.

But in the case of houses this does not apply.  Houses are scarce and overpriced not because there is an intrinsic supply shortfall but because an accumulation of regulations has created such a shortage.  House prices are excessive in all areas – US West Coast, UK, Australia – where regulations on land and buildings prevent supply from meeting demand.  House prices are not excessive where – most of USA, Germany – there are few constraints on converting land into home sites.  And Australia has far and away the greatest potential availability of land convertible into housing in the world.  Yet prices here are among the dearest because of the regulatory induced shortage.  As a result, over the past 40 years almost all Australians would have also had the difficult personal experience the Prime Minister had in getting into the property market.  But far fewer Texans or Germans would have faced the same burden.

Secondly, in discouraging foreign investment we are closing off a new resurgent income creating opportunity.  Australian house building is highly efficient (apartments are unfortunately controlled by monopoly building industry unions) and can be a source of economically viable, unsubsidised jobs. By placing a discriminatory tax on housing bought by foreigners governments are also acting at variance with free trade treaties which are supposed to “treat foreign investors and investments no less favourably than domestic investors and investments” and though there may be loopholes allowing differential treatment such provisions are in place to prevent distortions that favouring domestic investors bring about.

Sadly, the prevailing Australian fiscal policy approach is to find new sources of taxation rather than cuts in spending and such activity in the housing market both suppresses a viable industry and distracts governments from addressing the regulations on land and building which are the true causes of excessive housing costs.

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19 Responses to Housing taxes on foreigners will backfire on the economy

  1. Robbo

    I don’t buy the argument that foreign purchasers push up house prices. This move by the Federal Government to make it difficult, and in some cases criminal, for foreign purchasers to acquire property is just another revenue raising exercise that will get approval from a large chunk of an unthinking electorate that is happy to blame outsiders for anything. I am not surprised that the Victorian Government is chiming in with its own imposts on foreign buyers. Andrews, Pallas et al have never had an original thought in their lives so piggybacking on the Feds is a happy place for them and they can start to try and get some extra revenue to go towards reversing the billions they have already wasted in the few short months since they were elected. The whole exercise is the dumb leading the blind and stupid. Isn’t politics in Australia in a bloody awful mess?

  2. strange

    A good article until, “Sadly, the prevailing Australian fiscal policy approach is to find new sources of taxation rather than cuts in spending”. It doesn’t matter what the problem is for Alan Moran, the solution is always cuts in spending.

  3. Roger

    Sadly, the prevailing Australian fiscal policy approach is to find new sources of taxation rather than cuts in spending and such activity in the housing market both suppresses a viable industry and distracts governments from addressing the regulations on land and building which are the true causes of excessive housing costs.

    Yes, deregulation is the obvious solution tot he housing problem. But I don’t think governments are distracted on this issue; I think they simply lack the ticker to take on the vested interests who benefit from the present system.

  4. .

    strange – or should I say 1234 – the Commonwealth Government alone wastes tens if not hundreds of billions of dollars alone each year, before we even consider the States or Shires.

    Have you even read a summary of the Commission of Audit report?

    There is absolutely no justification for spending anymore. It is self harming for us as a society to do anything but cut spending.

    Not to mention the tax system is basically malicious and ought to be reformed as well as have deep cuts to rates and raised thresholds.

    If we were a wealthier country, we wouldn’t need such high rates to fund necessary items of expenditure – also the genuine welfare burden would lessen, on top of taking out the churn and corporate welfare in the first place which in part makes us poorer overall.

  5. Fibro

    Supply and Demand: The first rule of economics that I learnt.

    Housing is about the only market remaining in the country that is controlled by this basic.

    Naturally the gubbermnent wants to destroy it.

  6. .

    Supply and Demand: The first rule of economics that I learnt.

    Housing is about the only market remaining in the country that is controlled by this basic.

    Naturally the gubbermnent wants to destroy it.

    I wish you were right. The supply side is terribly constrained.

  7. Infidel Tiger

    A terrible government determined to get worse.

  8. Fibro

    Indeed it is Dot, in some areas like Sydney, so instead of changing anything in the basic supply/demand, the numbnuts want to ‘tweak’ something that will do nothing to change the fundamental. The only outcome will be to raise some taxes under the guise of helping working families and not change a thing.

    Deja Vu to so many tweaks made before really, but as the saying goes insanity is change nothing today and expect a different outcome tomorrow.

  9. Jeremy

    Australia has had below replacement birth rates since 1974. If it wasn’t for immigration and foreign buying house prices would be sinking like a stone and young Australians would be able to buy houses. Pretending that stopping the endless sugar hit of immigration and foreign property buying would be bad for the economy is crazy and irresponsible.

  10. Manlyorsum

    If you think housing is a simple matter of supply and demand, how can you not agree that reducing demand – by adding costs to foreign buyers – will help bring prices down, which will be in the interests of native Australians AND benefit the economy by reducing the amount of income needed to service mortgages.

    It is well established that the higher the debt burden (i.e. mortgages) the less free money is around to circulate through the economy, especially from middle/low earners who normally spend almost all income each month on something.

    I also know of at least one international company who has a complete ban on hiring any staff in Sydney as the cost of living is so high the salaries demanded makes it unrealistic compared to rural Australia or the rest of Asia. The staff are not more talented than other centres, but will not and cannot accept lower salaries due to rent/mortgage costs.

    All they need to do next is kill buy to let and negative gearing, and introduce land value taxes (not property taxes – should be on the land, not the building), to encourage sale of unproductive land, and you’ll see much more money in circulation within Australia AND a happier workforce.

  11. Bruce of Newcastle

    Henry Ergas, points to adverse implications of the attack on tax deductability for housing which would both to raise tax and lower demand competition for owner buyers.

    In the US interest is tax deductible for both investment real estate and home mortgages.

    Contrast with here where there is no mortgage deductibility on your home and investment property deductibility is under threat.

    Yet US houses are cheap. Ours are dear.

    In any such circumstance it is useful to consider why the likes of Hockey, Bowen (and the lefty MSM) attempting to say “look! a unicorn!” over negative gearing. It is always because those dissolute and craven politicians are avoiding hard tasks like cutting regulations and government expenditure. When will we get a government which isn’t made up of useless incompetent suit-warmers?

  12. Alan Moran

    Manlyorsum
    Killing buy-to-let and negative gearing would bring a far less happier workforce among those who rent since it would lead to a vast escalation of their costs. Putting a tax on land is not necessary or desirable to bring about sale of unproductive land. Merely easing the regulations would do this as can be seen in most of the US and Germany where there is little or no regulation preventing people from using land for housing and as a result a virgin unserviced block sells for just a thousand or so dollars compared to $100,000- $350,000 in Australia.

  13. Dorothy

    Talk to Alan Jones about this, now that he is broadcasting to an even wider audience, he can convince more gullible people who hang on his every word, that the Chinese are buying up ALL our properties driving up the prices. The Chinese are buying up ALL our farms . And not to mention the evils of CSG

  14. .

    If you think housing is a simple matter of supply and demand, how can you not agree that reducing demand – by adding costs to foreign buyers – will help bring prices down, which will be in the interests of native Australians AND benefit the economy by reducing the amount of income needed to service mortgages.

    That doesn’t reduce demand of you assume the demand determinants are similar.

    It reduces supply. The quantity demanded changes as demand would shift back along the demand curve.

    Please understand how supply and demand work before you offer poorly conceived solutions.

    Your idea (make housing relatively less affordable to foreigners) only works if there is pivot in demand – which still makes housing more expensive for natives, net of any reduction in supply.

    Even if you have two separate demand curves for foreign and domestic buyers, it would only work if foreign buyers had much less and more inelastic demand than Australians – and also on high end properties which are nearly irrelevant to the quantity of housing supplied – net of any changes to new dwellings supplied.

    All they need to do next is kill buy to let and negative gearing, and introduce land value taxes (not property taxes – should be on the land, not the building), to encourage sale of unproductive land, and you’ll see much more money in circulation within Australia AND a happier workforce.

    Sheer stupidity – higher taxes, inflation, central planning, debt isn’t involved in money creation, debtor favouritism and double taxation on losses.

    This will not make dwellings more affordable.

    If you consider yourself a Georgist, please study more economics. Your ideas are ridiculous and not in the same stead as the sensible proposal to consider unimproved land as an important broad base for efficient and fair indirect taxation.

    I also know of at least one international company who has a complete ban on hiring any staff in Sydney as the cost of living is so high the salaries demanded makes it unrealistic compared to rural Australia or the rest of Asia. The staff are not more talented than other centres, but will not and cannot accept lower salaries due to rent/mortgage costs.

    It would be quite a few – the costs of living in Sydney as well as the ridiculous labour on costs (on top of other factors) in this country are why firms have outsourced manufacturing to New Zealand from Australia for example [Fisher and Paykel].

  15. stackja

    A few questions. Ownership or investment? Red Chinese are supposedly not allowed by their Party to buy overseas. So how to handle this? While unions are protected by the ALP and a compliant MSM. Again how do handle this?

  16. blogstrop

    Yes, we have plenty of land. It will remain under-utilised in the regions because the twin handicaps of poor communications and poor transport infrastructure act against growth in population in those areas. This in turn stops the development of improved service delivery, of all manner of things readily accessed in the overcrowded cities.
    All these things mean fewer jobs as well, which feeds back into the failure of the regions to become more viable and attractive as an alternative to city living.

  17. Craig Mc

    Goddam those bastards investing in our country! We’ll teach them!

  18. Gab

    I saw and posted the article about the Libs taxing and penalizing furriners for buying property here.

    That was the last straw for me as far as ever voting for the Libs in the future goes.

  19. Justin

    The general theme of the blog is ok but the substance is wanting.

    House building in Australia is not efficient.

    It costs in excess of 50% more to build in Australia than the US (or UK, Canada) and is 33% less productive.

    Yes, government policy that restricts supply is the major cause of price increases at both state and federal levels.

    At the state level the restrictions on development and lack of housing supply, coupled with short-sighted and politicised planning, with adverse stamp duty (hello bracket creep), land tax (hello bracket creep), and overly restrictive planning and environmental restrictions / approval, resulting in massive windfall gains to state government, including the delaying of water infrastructure they push on to developers forced to build lakes or retention tanks, are huge costs eating away at developer margins to the point it is barely worth developing.

    Lost on government (with the utmost concern of housing affordability) is that all their policies and taxes are the major cause of housing affordability.

    Then of course we get to the Commonwealth Government that keeps adding a city the size of Hobart through immigration without any thought whatsoever about where such residents might live and how hard the state governments are making it for the suppliers of housing to keep pace with government demand.

    Of course it would be remiss to remind the Commonwealth Government that charging GST to new builds (i.e. developers who provide needed supply), is an inequitable tax on one particular asset class (new builds / developers) in a market where the price is determined by GST exempt property values. In other words, it is an additional tax on developers (plus stamp duty, land tax, open space tax) that cannot be recovered from buyers who can just as easily buy a comparable product 1 month older with no GST implications and in any event the price is relative to the broader non-GST market.

    Ordinarily, a glut of demand would lead to developers lining up to profit from filling said demand.

    Alas no. The planning and environmental hurdles at the local and state level render that approach useless.

    The tax grab from all levels of government dilutes the already thin margins. Land tax and stamp duty (state), open space contributions and building and planning permits (local), and GST on new housing (federal) but god forbid existing housing (just don’t mention the market distortion), coupled with a process, that despite all three levels of government with a hand in developer pockets, delays, frustrates, limits, and kills off projects as a first and natural reaction, nonetheless serves to make profitable projects uncommercial.

    Finally, we get to the issue of foreign investment and its interaction with the property market. Those who so casually dismiss the influence do so because they do not understand the property market. It is not one market but hundreds of sub-markets. In important areas the influence of foreign buyers does make an important impact on the overall market.

    This is irrespective of their overall size / market presence. Chinese buyers (in specific suburbs) are price setters. Which is to say they reset the benchmark and recalibrate the market up despite being a relatively small percentage of overall sales. This in turn has a cascading effect on neighbouring suburbs and can push the overall market higher than under domestic conditions.

    Chinese buyers definitely impact micro-markets (close to schools etc) which impact the overall market.

    To dismiss out of hand is lazy economics.

    Which is to get to the point of this blog, property and housing affordability is impacted by a complex interaction of multiple variables and cannot be reduced to simplistic analysis.

    That said and at the risk of being hypocritical, standardise tax treatment (especially GST), abolish open space contributions at local level, adjust tax levels for bracket creep at all levels, simplify the planning process, reform workplace relations that result in ridiculous rates of pay for contractors compared to counterparts (i.e. shut down union wage inflation and poor productivity), simplify regulations, and open up land for supply and amazingly we might be able to afford a comparable house one finds in Texas!!

    Don’t hold your breath!!

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