You Can’t Blame Foreigners For High House Prices

On Friday Daily Telegraph readers learnt an “elite audit and compliance unit” of the Commonwealth Treasury has been tasked to hunt down foreign investors who have illegally bought houses in Australia.

The elite unit will then force those “dodgy investors” to sell their properties, and prevent them from “pushing up house prices”.

This is … how shall I put it … a bit iffy.

Lots of reasons have been advanced for Australia’s high house prices. Some people blame negative gearing. Others blame things like first-home owners grants, or loose lending standards by the banks, or the Reserve Bank’s monetary settings, or just an irrational market boom.

Some of these are plausible, some less plausible.

The most likely culprit is that government regulation has unbalanced the relationship between supply and demand. State governments have restricted supply at the outer fringes of our cities and placed strict limits on development in the middle. This creates artificial scarcity and pushes up prices.

Anyway, these are all good theories, and worth serious discussion.

But the explanation being advanced by the Government – that foreign investors are causing, at least in part, our globally high house prices – simply doesn’t rate.

If there is foreign demand for investment in Australia, then supply should grow to meet it – unless supply is constrained in some way. Anyway, if you’re worried about foreign demand now, wait until you hear about natural population growth.

So it’s a bit disturbing that the foreigners-make-housing-expensive thesis appears to be a central part of the Abbott Government’s economic agenda for 2015.

In March last year Treasurer Joe Hockey asked the House of Representatives Economics Committee to look at foreign investment in housing. He wanted to know the pros and cons, whether that investment boosts supply of new houses, how Australia compares to overseas, and so forth.

The Treasurer may already have his own views. Back in 2010 he claimed increased foreign investment was “forcing up prices – particularly in Melbourne but all over the country”.

Anyway, the House Committee report was released in November. It’s 148 pages but the nub is this: “No one really knows how much foreign investment there is in residential real estate, nor where that investment comes from.”

That’s it. We don’t have enough information. Anything more than that is insinuation.

Still, insinuation is something that politics excels at.

Currently the Foreign Investment Review Board screens all foreign applications for house purchase. It is illegal for non-resident foreigners to purchase existing homes. Temporary residents have to sell their houses when their visas expire.

The fear is that some foreigners evade Foreign Investment Review Board screening and buy houses illegally, or fail to sell them when they go home.

But there hasn’t been any court action against foreign investors by the Foreign Investment Review Board since 2007. The committee writes that it “defies belief that there has been universal compliance” with the rules for that long.

Perhaps. But really we have no idea. Foreign investment laws are probably broken occasionally. But then again all laws are broken occasionally. The question is whether it happens often enough to draw the attention of the upper echelons of the Australian government.

And there is no evidence – none – to suggest that.

Of course the point here isn’t the sanctity of the law. It’s the politics of foreign investment. This is a political gambit designed to play to the assumed xenophobic instincts of the electorate.

You’ve heard the rumours about people being outbid at auction by “Chinese” buyers? Well, here’s a Commonwealth government policy to match!

I’ve written on The Drum in the past about how regressive and damaging restrictions on foreign investment can be.

Recall Kevin Rudd’s claim in the 2013 leaders’ election debate that he was “a bit anxious, frankly, about simply an open slather approach” to foreign investment, particularly in agriculture.

At that debate Tony Abbott was on the pro-foreign investment side, despite the Coalition’s policy to lower the review threshold for agriculture investment.

The political hostility to foreign investment was sparked by the Gough Whitlam-led Labor opposition in the late 1960s and early 1970s, and blindly aped by John Gorton and Billy McMahon as they tried to demonstrate Liberal Party renewal.

This was an era when closing the borders to foreign money was seen as the “progressive” thing to do.

But in 2015 it seems incredible that, in such a country so hungry for capital, Australia’s political leaders are still trying to lay the blame for our economic problems on foreigners.