Analysis: Foreign buyer ban: It’s the enforcement, stupid

Scroll down for the latest LINZ (Land Information New Zealand) foreign buyer data

I’m not a fan of a ban on foreigners buying existing homes.

But if you’re going to do it, do it right.

“How will this be enforced?” Associate Finance Minister David Parker was asked last night.

“It will be enforced by making it illegal for a non-resident, non-citizen to buy New Zealand land,” Mr Parker replied.

It will be enforced by making it illegal. Oh, brother. Labour seems to have learned nothing from Australia's recent experience.

Unless, of course, Labour wants to have it's cake and eat it to. That is, a foreign-buyer ban that plays well to the cheap seats, but isn't that effective so doesn't rankle China.

“For those who want to because they’re going to be building a house for on-sale, they’ll have to go through a consent process via the Overseas Investment Office," Mr Parker continued.

“We’re also likely to require a certificate from the solicitor who signs the transfer document that goes through the Land Registry Office to certify to the best of their knowledge, the person who is buying is not an overseas person.”

Australia took the same tack in 2006 when the federal government passed a similar measure. The enforcement was simply that it was against the law.

As in New Zealand, the global financial crisis subsequently smacked house prices, and the issue stayed on the back-burner – until 2014, when, amid skyrocketing prices in metro areas, and a blush of newspaper articles about wealthy Chinese citizens buying up Sydney mansions, it was noted that there had not a single prosecution for a breach of the foreign buyer curb since it was introduced.

That was addressed in late 2014 by the government introducing much tougher penalties for those who broke the rules: a fine of up to $A127,500 for individuals, up to $A637,500 for companies, and up to three years’ jail for offenders.

But by mid-2015, media noted that only $700,000 in fines had been dished out as house prices continued to rise.

So after phase one (simply making it illegal) and phase two (introducing deterrent fines), the Aussies finally got around to phase three: enforcement.

Five staff at the Foreign Investment Review Board (the Aussie equivalent of our Overseas Investment Office) were supplemented by 50 from the Australian Tax Office.

Since then, things have heated up a little. Earlier this year, the ATO reported that foreign investors had been forced to sell 15 properties worth $A100 million in the previous year (in a market where about 500,000 properties change hands each year, according to Reserve Bank of Australia statistics).

It seems more enforcement is needed to serious analyse sales but, with the Australian housing market finally cooling off (because of a number of factors, including Chinese government restrictions on capital outflow), the pressure is off.

Here, we seem to be at just the beginning of the learning curve – back where Australia was with its naïve “it will be enforced by making it illegal” position in 2006.


POSTSCRIPT: LINZ foreign buyer stats for April 1, 2017, to June 30, 2017

Mr Parker says it’s hard to say what impact Labour’s foreign buyer ban will have on the market, as previous governments have kept no tabs on sales to non-New Zealand residents, and National’s tracking measure (requiring a non-New Zealand resident to have a New Zealand tax number) was inadequate.

He adds that he’s ideologically opposed to foreigners buying existing homes in any case.

“I have a pretty simple view of this. I don’t think that it should be an international market for houses. I think local homes are to live in,” he says.

“They shouldn’t be commodities that we trade internationally. I think just about everyone who’s a foreign person buying into New Zealand – they’re a very, very wealthy one-percenter if you like. And I think that’s one of the excesses of global capital when you allow those sorts of interests to influence your local housing market.”

Regardless of what Mr Parker thinks of its data, LINZ has been tracking sales by tax residency.

Critics argue that actual sales to non-NZ residents are higher due to people gaming the system through relatives or trusts or friendly real estate agents or lawyers but my take is that, if people won’t play ball with the existing tracking measure, they’re not about to follow the new rules either – especially if they’re lightly enforced or (as the plan seems to be at the moment) not enforced at all. So they probably do represent the sales that will be affected by the foreign buyer ban.

Note that Australians will be exempt from New Zealand’s measure, just as New Zealanders are exempt from the Australian rules described above.

Here’s the latest LINZ report:

Of the 48,603 property transfers registered with Land Information New Zealand from April to June 2017, there were 27,471 transfers where the property buyers provided only a New Zealand tax residence (57%). There were 1515 transfers where at least one of the property buyers provided an overseas tax residency (3%). 

Of those:

• 414 were tax residents of China (0.85% of 48,603)

• 348 were tax residents of Australia (0.71%; exempt from the pending ban)

• 240 were of mixed tax residency, including NZ (at least one of the buyers has NZ tax residency)

• 84 were tax residents of United Kingdom (0.17%)

• 84 were tax residents of USA (0.17%)

• 66 were tax residents of Hong Kong (0.14%)

• 279 60 (0.57%) were tax residents of 49 other countries, each with fewer than

LINZ adds: There were 19,617 transfers (40%) where tax information was not required because it involved the main home or for other reasons. To claim the main home exemption a person needs to live at the property and can’t be an “offshore person”, so there is a clear connection to New Zealand. Other reasons include Māori land, Treaty settlements, and purchases for central and local government purposes. Tax residency is not the same as nationality. You can live in New Zealand and also have tax residency in another country. Alternatively, you could be an overseas citizen and have only New Zealand tax residency.

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