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Ups and downs of real estate

Australian Property/Buying in gets tricky

Making an assessment of whether or not to invest in Australian real estate is hard enough for those of us who live here, let alone for international investors or those who seek a bolt hole for the future or a place to escape the worst of northern winters.

Since Australians themselves are confused about the future of real estate as an investment, it is not surprising to  find that overseas visitors find the prospects difficult to unravel. Articles in the Australian media in recent days have talked up a bubble in house prices, particularly in Sydney, while simultaneously arguing that the long-term trend is down because they believe there will be a fall in population growth. There is an expectation that mortgage interest rates will fall further this year to a three-decade low, but very little evidence to suggest this will spur a buying spree except in the most sought after locations.

As in London, Hong Kong, Shanghai and some other financial capitals some people have made a lot of money out of property. But though the trend has been mostly upward, the Australian market is volatile and likely to remain so. The leading cities of Sydney and Melbourne emerged from a stagnant period two years ago, and in 2014 and so far this year have  experienced significant rises.

But you do not have to travel for more than 100 kilometres out of either city to find a very depressed market, even in beautiful coastal or mountain locations with access to some of the world’s best beaches. Here there are bargains to be had for the cash buyer who is prepared to take a ten-year view.

For example in the rolling green hills between the ocean and the mountains on the mid-North Coast of New South Wales you can buy farm homesteads with hundreds of hectares or fertile land for less than the price of a one bedroom apartment in London or New York.

There are, however, complex rules on foreign investment in residential real estate for those who are not Australian citizens, or permanent residents, and they are about to become more complicated. These rules have a political purpose, in that they are designed to encourage the expansion of the country’s housing stock, which basically means new apartment blocks or town houses in urban areas. However foreigners can buy building land, or purchase a newly constructed home with Foreign Investment Review Board approval, which is usually given. The problem comes if you want to buy an existing home. Normally, you can only do this if you are a temporary resident with the appropriate visa, and then you must live in the property yourself (it cannot be rented out) and you must sell it when you leave.

In recent years, these rules have been cleverly flouted by foreign buyers who have formed an Australian company, and used that as the purchase vehicle. The Abbott government has now closed this loophole. In March treasurer Joe Hockey ordered Chinese 15th richest man to sell within 90 days a Mediterranean=style villa on Sydney Harbour he’d bought last year for a posted price of $39 million.

Farm property, known as rural land,  is treated differently. So long as it is not a ‘hobby farm’  – for example a smart residence with a small vineyard or a pasture for occasional grazing – this is treated as a business, and an individual from overseas can acquire a business valued at leads than $ 248 million. With the $A lower this has become the subject of some controversy, and it is as well to seek advice.

The Federal government will shortly legislate new penalties for those flouting FIRB rules. Apart from forcing sales, these will include forfeiting a percentage of the price, possibly as much as a quarter.

These rules do not apply to new apartments or developments. Last month all individual units in an apartment block were sold off the plan, mostly to Chinese buyers. The latest survey of new residential property compiled by the National Australia Bank indicated that offshore buyers accounted for one in five sales in NSW and Victoria.

For foreigners Australian property prices are much cheaper than a year ago, with a 25% fall in the value of the $A against the greenback. Even if the pundits who predict a slowdown in Australian population growth are correct – and we do not believe they are – demand from overseas for an apartment in what The Economist deems two of the world’s most liveable cities seems unlikely.