Let­ter to PM on Res­i­den­tial Prop­erty Prices and For­eign Invest­ment Laws

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The news that the Rudd Gov­ern­ment was rolling back its changes to Australia’s for­eign invest­ment rules on hous­ing came as we were still on The Walk. Just prior to start­ing it, I received a note from Dr John Daffy, with the fol­low­ing let­ter from him to the PM attached. I asked John whether I could pub­lish his let­ter on the blog, and he agreed.

Just as the absence of sta­tis­tics on for­eign pur­chasers means we’ll never really know the impact they had on the mar­ket, we’ll prob­a­bly never know how many indi­vid­u­als like Dr Daffy sent sim­i­lar let­ters to their MPs and the PM; but judg­ing from the rapid back­flip on that pol­icy, there must have been plenty.

Prior to the change, 50% of “off the plan” apart­ment sales could go to non-res­i­dents; after it, 100% could; now we’re back to the 50% ratio. So the changes restore the sta­tus quo on that point.

But they don’t go far enough. The prop­erty lobby for­ever asserts that the cause of high house prices is under­sup­ply; here’s a sim­ple pol­icy mea­sure then to increase the sup­ply of apart­ments for peo­ple who actu­ally live in Aus­tralia. Why should only 50% of new apart­ments be reserved for local buy­ers? Why not 90%?

Allow­ing up to 10% of new apart­ments to be pur­chased by non-res­i­dents should more than cater for war­ranted pur­chases by globe-trot­ting non-res­i­dents in our glob­alised econ­omy. I sus­pect that allow­ing a fur­ther 40% to be pur­chased by non-res­i­dents caters more to the prop­erty lobby than it does to the jet­set.

Dear Mr. Rudd

Re: Aus­tralian Res­i­den­tial Prop­erty Prices and For­eign Invest­ment Laws

I write to you to ask for an expla­na­tion as to why for­eign invest­ment laws have been changed in Aus­tralia allow­ing non res­i­dents to pur­chase res­i­den­tial prop­erty (oth­er­wise known as fam­ily homes)

This deci­sion has resulted in approx­i­mately 30% of fam­ily homes in inner Mel­bourne being sold to peo­ple who are not res­i­dents of this coun­try and has been a major fac­tor in increas­ing fam­ily home prices dra­mat­i­cally, in what was already the most expen­sive real estate in Australia’s his­tory rel­a­tive to wages.

Suc­ces­sive gov­ern­ments have also inflated prices with home owner’s grants and approx­i­mately 5 bil­lion dol­lars of tax breaks per year for land­lords at the expense of poten­tial home own­ers (with neg­a­tive gear­ing) Suc­ces­sive gov­ern­ments (State and Fed­eral) have also dra­mat­i­cally increased immi­gra­tion and ensured outer sub­ur­ban land is arti­fi­cially more expen­sive than it should be due to a num­ber of poli­cies which limit sup­ply.

The Rudd Gov­ern­ment has played a major role in increas­ing these prices to the absurd lev­els we now have with the aver­age per­son com­pletely unable to buy the aver­age home in this coun­try. So much for work­ing fam­i­lies. It has man­aged to do this with the first home own­ers grant, a flood of for­eign investors and changes to the super­an­nu­a­tion laws.

The recent changes to the super­an­nu­a­tion lim­its were “spun” as “clos­ing a loop­hole” whereby the “rich” received a tax deduc­tion. The net result of this pol­icy is to drive peo­ple in to neg­a­tive gear­ing in prop­erty and fur­ther inflate house prices away from the aver­age home owner who pays the full inter­est on his loan( with no sub­sidy from the Aus­tralian Tax­payer). The Rudd gov­ern­ment is obvi­ously con­vinced that the home prop­erty mar­ket needs to be inflated even fur­ther and is very will­ing to sup­port the banks in this pur­suit.

To add fur­ther insult, peo­ple who are sav­ing for a deposit on their home have the inter­est on their deposit taxed at their mar­ginal rate (keep­ing them fur­ther away from a ris­ing mar­ket.) They may as well be sub­si­diz­ing their own land­lord who is invari­ably get­ting a tax deduc­tion.

I have watched in dis­be­lief as gov­ern­ments have done EVERYTHING they pos­si­bly could to pump up house prices. For­eign­ers’ buy­ing our fam­ily homes and fur­ther inflat­ing prices is the final straw. Allow­ing peo­ple who don’t live in this coun­try and do not pay tax to drive Aus­tralians out of Aus­tralian homes is a national dis­grace.

I call on the Rudd gov­ern­ment to roll back imme­di­ately the for­eign invest­ment laws which allow this national dis­grace to occur.

Yours Sin­cerely Dr John Daffy

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  • joshua

    Just to add to my pre­vi­ous post. 

    The demand is real and exist but I did not address issues about delib­er­ately releas­ing land slowly to sus­tain these high prices. I did not even address huge intake of migrants or other issues such as open­ing the prop­erty mar­ket to non res­i­dences.

    In real­ity the demand can be manip­u­lated for decades and decades as we have seen from 1980 to now. How­ever, I strongly believe the end is near. Not sure whether this can carry on for 5 years or 10 years but peo­ple were say­ing 2008, then 2009 and 2010. Already 5 months into 2010 and still think not this year.

  • bb

    TITINT, Aac, Mar­co2, ak, and mick­eyc,

    Thanks for your thoughts. Great dis­cus­sion.

    Mick­eyc, I feel like I failed in my quest. Nevermind…It’s been fun try­ing.

    Some inter­est­ing data — dwelling approvals up again.…charts are now look­ing quite steep. HERE COMES THE SUPPLY.….(I may turn bear­ish yet!!)


    Also found another link which puts australia’s price / income ratio into per­spec­tive. Not sure about the source though. Has any­one seen this before?


  • bb

    ak @ 121,

    You said

    How­ever I would be care­ful with using the word “per­ma­nently”. Some of the processes which enabled the change in rel­a­tive prices of hous­ing com­pared with other goods and ser­vices are reversable in the long run – espe­cially the avail­abil­ity of cheap financ­ing.”

    I admit my eco­nom­ics is not strong, but the avail­abil­ity of cheap credit moves the demand curve does it not? The effect on sup­ply curve would be to lower the cost of pro­duc­tion (lower cost of cap­i­tal) and shift it to the left?

    But I take your point on the sup­ply curve. I was a bit extreme say­ing “per­ma­nent”. Gov­ern­ment can always sub­sidise land again (as they did prior to the 1980’s) and the sup­ply curve could shift back to the left.

  • ak


    In my opin­ion the avail­abil­ity of cheap credit dra­mat­i­cally increases the pur­chas­ing power of home buy­ers.

    Cheap financ­ing didn’t make the houses cheaper — quite the oppo­site. It made them larger and built using more expen­sive mate­ri­als what off­set the damp­en­ing effect of lower financ­ing costs on total pro­duc­tion costs. Buy­ers actu­ally wanted to increase their expo­sure not to reduce it. 

    I would not be sur­prised if the era of cheap credit may be soon over. Then the sup­ply curve will also shift back. Peo­ple have to live some­where after all.

  • bb
  • Robbo

    ak @129
    Just expand­ing fur­ther, if the prop­erty spruik­ers claim there is a short­age of prop­erty and thats dri­ving home prices upwards, i assume then as house prices are falling, as the GM from Residex said on radio ABC yes­ter­day morning,60% of houses on the mar­ket have dipped 3% so far this year, i assume we have a hous­ing over­sup­ply!!!

    I agree, cheap money encour­ages more debt dri­ving up home prices. Pop­u­la­tion growth is not the main dri­ver.

  • Robbo
    I agree about cheap money and its coni­ta­tion to debt it causes inef­fi­cien­cies, unpro­duc­tive­ness and results in the mess we are now in. All, Banks Lenders and Bor­row­ers played a part. Respon­si­bil­ity may be attrib­uted to the smart ver­sus the dumb. It is immea­sur­able. Who is smart and who is dumb under the law? Degrees I guess depend­ing upon the level of the trans­ac­tion. Com­mon denom­i­na­tor –Want­ing to gain some­thing in advance of earm­ing it = GREED. A very human trait.
    We’ll see just how we adjust to the enevitable cor­rec­tion for in sim­ple terms there must be one just based on the imbal­ance of what I have just stated — One smarter party tak­ing advan­tage of a dumber party with both think­ing they are going to win, when only one can. Com­mon denominator=GREED

    Govts also con­tribute for their GREED is power (and wealth their pen­sions from the pub­lic purse)

    It will be inter­est­ing to see just what unfolds within the next 12mos to 24 mos.

    I have sold every­thing at 65 years of age and hav­ing been a punter (not horses or gam­bling just busi­ness, a goer all my life if you like)I watch with inter­est for no mat­ter how much the hous­ing mar­ket goes up it is wrongly based and even­tu­aly cash earneed will relplace asset lever­ag­ing in a pro­duc­tive form of earn­ings. I don’t think in the scheme of things that the time is too far off say 2 years out­set.

  • mahaish

    a) Greece will default
    b) Key banks in the Euro­zone will be seized by gov­ern­ments
    c) Euro will devalue a bit, to the ben­e­fit of EU exporters
    d) The EU admin will use their con­trol over pri­vate banks to change finan­cial reg­u­la­tions
    e) The US will fol­low”

    hi frank,

    the greek debt prob­lem is a bank impared assett prob­lem. the imf and the

  • mahaish

    a) Greece will default
    b) Key banks in the Euro­zone will be seized by gov­ern­ments
    c) Euro will devalue a bit, to the ben­e­fit of EU exporters
    d) The EU admin will use their con­trol over pri­vate banks to change finan­cial reg­u­la­tions
    e) The US will fol­low”

    hi frank, let me try again, i acci­dently hit the wrong key.

    the greek debt prob­lem is all about the poten­tially impared assett expo­sure ger­man and french banks among oth­ers have in regard to greece. so i doubt very much if key banks in the euro­zone will be taken over by gov­ern­ments. the whole pur­pose for the imf and euro­zone bailout of greece , is to bailout the banks that have expo­sure to the greek sov­er­eign debt prob­lem.

    from my under­stand­ing of ECB(EUROPEAN CENTRAL BANK) bank­ing oper­a­tions , the NCB’S (NATIONAL CENTRAL BANKS)control cur­rency issue, in this case euro’s, and its there respon­si­bil­ity to co ordi­nate mon­e­tary pol­icy in a man­ner that allows them to achieve the ecb man­dated inter­est rate tar­get. now in the case of greece they are run­ning deficits that are upwards of 4 times greater than EMU(european mon­e­tary union) man­dated tar­gets.

    so they have bro­ken the rules, but my curios­ity lies in what would hap­pen if they keep break­ing the rules, and keep run­ning large deficits in defi­ance of emu guid­lines in order to reflate their econ­omy. lets not for­get the the greek cen­tral bank is respon­si­ble for cur­rency issue, not the ecb.

    they would have dif­fi­culty in co ordi­nat­ing their inter­est rate regime with the rest of the euro­zone, but so what.

    so rather than take on some harsh imf pol­icy regime and poten­tially dis­man­tling their auto­matic sta­bilsers, they just keep flout­ing emu rules and there treaty oblig­a­tions, run large enough deficits to counter act any defla­tion­ary forces, issue no bonds , and dare the emu to expell them.

    i have to dig into this bit fur­ther to see if its a plau­si­ble sce­nario. it may not be. but we are talk­ing about a legal frame­work , so it may not be worth the paper its writ­ten on.

    so you may be right the greeks may default regard­less of the imf step­ping in, because the aus­ter­ity mea­sures will cer­tainly under­mine social and polit­i­cal sta­bil­ity, which may fos­ter a break­away move­ment within greece any­way.

    surely allow­ing greece to run large deficits for a sus­tained period of time allow­ing the emu to under­write the assett expo­sure of those ger­man and french banks to greek sov­er­eign debt, is bet­ter than a poten­tial polit­i­cal and socail rev­o­lu­tion in the repub­lic.

    the US sit­u­a­tion is totally dif­fer­ent, in that it is sov­er­eign in its own cur­rency, so it is at no risk of insol­vency. fur­ther­more it is the global reserve cur­rency. the US gov­ern­ment can hon­our its lia­bil­i­ties in a blink of an eye, in terms of mak­ing port­fo­lio adjust­ments of var­i­ous investors bank and trea­suries accounts .

    if greece wants to play by the rules it has no such sus­tain­able options avail­able to it, since it has signed itself up to devolv­ing its cur­rency sov­er­eignty.

    im just mus­ing out aloud on this sit­u­a­tion, and im pre­paired to accept i may be wrong about the greek sit­u­a­tion

  • mahaish

    Spot on”

    hi bb,

    jim chanos gets a men­tion. he became noto­ri­ous for aussies, in putting mac bank at the top of his short­ing list a few years ago. at the time i agreed with him, because i had been on about the dubi­ous deal­ings at mac bank for years.

    well, mac bank is still around, and may be still around for awhile yet, so we both have that one wrong for the time being.

    well, chanos is now wor­ried about china, so he is short­ing us.

    the link is to some­one who has a more opti­mistic view on the china sit­u­a­tion


    it will be inter­est­ing to see who gets it right.

  • mahaish.
    Talk­ing about the Mac Bank and oth­ers. Page 8 of the AFR Wed May 5 “Big four stick to script” by Jane Searle.
    The arti­cle in breif dis­cusses the “mar­gin” between deposit and loan inter­est nar­row­ing con­sid­er­ably with the lat­est inter­est rate hike. The arti­cle states “Mac­quarie Bank ana­lyst Tom Quarmby said the big four banks had recog­nised that “it’s a point­less exer­cise to can­ni­balise each other’s term deposit rates and no one except the con­sumer wins” ‘A period of irra­tional pric­ing is end­ing as banks like the Com­mon­wealth and West­pac slow mort­gage growth, while all banks have increased the term of their fund­ing” he said.
    I love the part where he basi­cally says it’s a point­less exer­cise to have com­pe­ti­tion when only the con­sumer wins.

    It just about sums up invest­ment bank­ing, a state­ment that Gold­man Sachs would have been proud of “To hell with the cus­tomer, What about us”?

  • bb


    IMO, Mac­quarie was saved by the gov­er­ment guran­tee (ie: us!). With­out that, Mac­quarie was gone.…and they knew it.

    As we see now with Greece, soverign prob­lems are harder to solve, espe­cially with a pegged cur­rency.

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