28,590. That was the number of new detached houses that commenced construction in the final quarter of 2022 in Australia.

This would have barely qualified as a good quarter in the 1970s. Multi-unit commencements have also come a long way down. After an unprecedented apartment boom last decade, a series of taxes, restrictions and the loss of overseas arrivals during the pandemic has halved multi-unit commencements compared to six years ago, when foreign investment surcharges were introduced.

The total number of new homes being commenced across Australia is no better than the average of the past 40 years.

And yet, there are almost 11 million, or 70 per cent, more Australians than there were in 1982.

Net overseas migration has grown from around 110,000 per year in the early 2000s, to more than 300,000 following the re-opening of international borders. At the same time, a changing demographic composition has seen the average household size fall. Putting these factors together – a larger population, accelerating migration and falling household size – it is not hard to see why we have a shortage of housing in Australia.

Attracting more foreign investment to the housing market is one clear way of alleviating the housing shortage. Unfortunately, both state and federal governments have implemented a raft of regulations and taxes in recent years aimed at precisely the opposite.

In the 2017-18 Budget, the federal government introduced a range of measures aimed at limiting foreign ownership in new dwellings, the most significant of which was a 50 per cent cap on foreign ownership in new developments. 

The objective of these measures was to ‘ensure that dwellings in new developments in Australia are kept available for Australians’ – which is code for saying that foreign investment in housing displaces investment from Australians. Foreign investment had indeed surged in the years leading up to the 2017-18 Budget. But this surge was driven by several factors, such as planning changes, pent up demand from earlier population growth, the end of the resources boom and investment in Commonwealth Games housing, to name a few.

Importantly, even at the peak of foreign investment in 2016, foreign dwelling approvals (as reported by the Foreign Investment Review Board, or FIRB) accounted for less than 20 per cent of the total reported by the ABS. In other words, foreign investment is simply not sizeable enough to offset local investment.

Further, the boom in foreign investment was mostly in off-the-plan apartments, whereas 70 per cent of Australians live in detached houses. And given that most bank lending is for owner occupiers rather than for investment purposes, the claim that foreign investment results in fewer dwellings being available for Australians simply doesn’t stack up.

Fees and taxes imposed on foreign investors have also begun spiralling out of control. Foreign investors in all states (not including the NT and ACT) are now slugged with a 7 or 8 per cent stamp duty surcharge (over and above ‘standard’ duties levied on all transactions). While NSW, Victoria, Tasmania and the ACT also impose foreign surcharges on land tax equivalent to between 1 and 4 per cent of average land value.

Fees payable to the FIRB also doubled in 2022 to at least $13,200 on each transaction worth less than $1 million.

All this adds up. HIA estimates that an overseas investor looking to purchase a property in Sydney – by far the largest market – must pay $150,000 in stamp duty, land tax and FIRB fees, around three-quarters of which is solely through foreign surcharges. Altogether, stamp duty, land tax and FIRB fees account for between 15 and 20 per cent of the median dwelling price in major housing markets.

An ideal tax should be both efficient and equitable. Foreign investor surcharges on stamp duty and land tax fail both of these criteria. First, they create a wedge between foreign and domestic buyers, which distorts the market price and makes them inequitable. Second, they exacerbate the existing inefficiencies of stamp duty by distorting efficient resource allocation.

FIRB fees are not quite as bad, and in fact aren’t technically considered a tax. However, the FIRB noted in its latest annual report that foreign investment application fees are likely to have contributed to a decline in foreign demand for residential real estate. And that comment came before the doubling of fees in 2022, meaning the effect on overall investment will likely be larger now.

The cost of these surcharges is ultimately transferred to future renters and the wider economy. The net effect is less housing: either investors have to pay more for investment properties, which may deter them from entering the housing market; or builders will be forced to accept a lower sale price, which will discourage them from taking on new projects (or perhaps more accurately, lessen the appetite for banks to lend to them).

At a time when overseas arrivals are soaring, combined with longer term growth in a population which needs more houses per person, we need more houses to be built, not less. 

Rather than preventing Australians from entering the housing market, greater foreign investment will lead to more activity in the market, which ultimately will mean more houses being built. That’s a win-win for future homeowners as well as the residential building industry.

First published on 24 May 2023