Foreigners on a temporary visa may only purchase a single established dwelling to live in, which they are usually required to sell when they move out. In general, temporary and non-resident foreign persons will only be permitted to purchase new-build homes without conditions. So the obstacles to foreign investment in housing are very much higher - in theory.
In practice, however, the Australian Government has become concerned that there has been a significant level of evasion by foreign buyers. Accordingly, the Australian Government announced last weekend that it is moving to enlist the services of the Australian Taxation Office's sophisticated data-matching systems and specialised staff with compliance expertise to try and catch out foreigners buying property for investment purposes. Penalties for non-compliance are also being significantly increased, coupled with increased scrutiny around foreign investment in agriculture and a comprehensive register of foreign-owned land.
Frankly, it seems unlikely that surging Australian house prices have been driven primarily by a thriving black market in foreign residential property investment. Of course foreign investors who flout the law should be caught and they should be punished, just as in New Zealand.
But just as the Overseas Investment Office's enforcement activities in New Zealand are aimed primarily at enforcing a level playing field and the rule of law, increasing the penalties for non-compliance with Australia's foreign investor regulation without changing the underlying policies seems unlikely to have much effect on house prices in the long run.
So adopting tougher restrictions on the foreign ownership of residential property may not have the desired effect. The Australian experience suggests that it will generate a great deal of additional work for the Government without much impact on property prices.
The prospect of the IRD snooping through property transactions looking for foreigners is unattractive. Worse, if the policy did succeed in reducing house prices, the downstream economic effects of a sudden correction in Auckland house prices would be bad for the whole country.
Perhaps the only part of the recent announcements in Australia that could usefully be adopted in New Zealand is the proposal to establish a register of foreign-owned land. At the moment nobody in New Zealand really knows how much New Zealand land is foreign-owned, although best estimates suggest that the amount is probably fairly small. All foreign investments that receive Overseas Investment Office consent are publicly available anyway, but there is no record of overseas-held land that has not gone through the overseas investment process.
Land Information New Zealand has done some preliminary work on how such a register might work in New Zealand, but there is no current proposal from the Government. Establishing a register of foreign-owned land in New Zealand would at least allow us to make decisions about foreign investment in New Zealand based on evidence, rather than relying on unpleasant and racist assumptions such as that cashed-up Chinese buying Auckland property are necessarily foreign-born.
The problem of Auckland house prices does not have a simple solution, and it is unlikely that a single change to policy and law will resolve them overnight. But the experience in Australia suggests that singling out foreign investors is unlikely to be the answer.
James Dunne is a partner at Chen Palmer law firm.
