Residential real estate – temporary residentsTemporary residents generally need to apply for and receive foreign investment approval before purchasing any residential real estate in Australia.
Who is a temporary resident?A temporary resident is an individual who:
- holds a temporary visa that permits them to remain in Australia for a continuous period of more than 12 months (regardless of how long remains on the visa); or
- is residing in Australia has submitted an application for a permanent visa and holds a bridging visa which permits them to stay in Australia until that application has been finalised.
We need to look at the different property classes
An established dwelling is a dwelling on residential land that is not a new dwelling.
Commercial residential premises such as hotels, motels and caravan parks are not included in the definition of an established dwelling.
Temporary residents will normally be allowed to purchase only one established dwelling to live in as their residence (home) in Australia, subject to the conditions that they:
- use the property as their principal place of residence in Australia;
- do not rent any part of the property, including ensuring that it is vacant at settlement; and
- sell the property within three months from when it ceases to be their principal place of residence.
Temporary residents are not permitted to purchase established dwellings as investment properties, to rent out, or as holiday homes.
Temporary residents need to apply and receive approval before purchasing an established dwelling for redevelopment.
Established Dwelling Exemption Certificate (Auctions)
Properties sold at auction generally require all bids to be unconditional. As temporary residents require approval to take an interest in an established dwelling, under the framework temporary residents would be required to seek individual approval to bid at each auction they attend.
To streamline the process and allow temporary residents to comply with the foreign investment rules and bid at more than one auction while only acquiring one established dwelling, temporary residents can apply for an established dwelling exemption certificate. This certificate will allow a temporary resident to purchase one unspecified established dwelling up to a specified value, and only pay one fee on application for the certificate. Such exemption certificates will normally be subject to the conditions that apply to established dwelling approvals, and that the temporary resident must report on any purchase made.
Temporary residents will normally be allowed to purchase new dwellings in Australia without being subject to any conditions. Temporary residents may purchase new dwellings in addition to one established dwelling (that is used as their primary residence). There is no limit on the number of new dwellings a temporary resident may purchase, but approval is generally required prior to each acquisition.
A new dwelling is a dwelling that will be, is being, or has been built on residential land, has not been previously sold as a dwelling, and has either:
- not been previously occupied; or
- if the dwelling is part of a development (50 or more dwellings) and was sold by the developer of that development, has not been previously occupied for more than 12 months.
New dwellings do not include established residential real estate that has been refurbished or renovated.
A single dwelling that has been built to replace one or more demolished established dwellings would generally not be treated as a new dwelling for the purposes of Australia’s foreign investment framework.
Exemption to purchase a new dwelling in a development
Developers may hold a new dwelling exemption certificate that allows them to sell new dwellings in the development specified in the certificate to foreign persons. Where a developer has this certificate, the temporary resident may not require a separate approval. The temporary resident should ask the developer for a copy of the exemption certificate for the development in which they are intending to purchase. If the exemption certificate covers their intended purchase, they do not need to seek separate foreign investment approval.
Vacant landTemporary residents will normally be allowed to purchase vacant land for residential dwelling development, subject to conditions that:
- the development is completed within four years from the date of approval; and
- evidence of completion of the dwellings is submitted within 30 days of being received. This could include a final occupancy or builder’s completion certificate.
In exceptional circumstances where the development cannot be completed within the specified four years, the temporary resident could apply for a variation to the condition (the application for the variation must be made at least two months prior to the end of the period). A fee will apply for this. Variations will be considered on a case-by-case basis.Vacant land that previously had an established dwelling on the land would generally not be treated as vacant for the purposes of Australia’s foreign investment framework. As such, foreign persons would generally not be eligible to purchase vacant land that previously had a dwelling built on it (unless they are proposing to construct multiple dwellings on the land which will increase the housing stock).
Established dwellings for redevelopmentTemporary residents will normally be allowed to purchase an established dwelling for redevelopment in Australia, provided the redevelopment genuinely increases the housing stock. Such proposals are normally approved subject to conditions that:
- the existing dwelling cannot be rented out prior to demolition and redevelopment;
- the existing dwelling is demolished and construction of the new dwellings are completed within four years of the date of approval; and
- evidence of completion of the dwellings is submitted within 30 days of being received by the applicant. This could include a final occupancy or builder’s completion certificate.
Strict penalties (including civil and criminal penalties and disposal orders) may apply for breaches of Australia’s foreign investment rules.
Cases of non-compliance with Australia’s foreign investment framework may also be brought to the attention of law enforcement agencies and other Commonwealth departments such as the Department of Immigration and Border Protection.
How to applyIf you would like to apply for foreign investment approval for:
- A new dwelling
- Vacant residential land
- A second hand or established dwelling
- An exemption certificate for established dwellings – an auction certificate
Foreign persons should take care to ensure they supply the correct details and all required information as part of their application as changes to details, such as name or property address, after an approval has been granted may require foreign persons to seek a new approval and be subject to further fees.
The Latest House Price Data As House Price Rises Accelerating In Australia
Australia’s housing market continues to rise, amidst modest economic growth. House prices rose by 11.4% in Australia´s eight major cities during the year to end-Q3 2015 (9.72% inflation-adjusted), up from an annual rise of 9.23% in a year earlier and the highest y-o-y increase since Q2 2010, based on figures from the Australian Bureau of Statistics (ABS). House prices increased 2.17% (1.71% inflation-adjusted) quarter-on-quarter in Q3 2017.
Sydney saw the biggest increase, with residential property prices surging by 19.9% (18.1% inflation-adjusted) during the year to Q3 2015, followed by Melbourne (9.9%), Canberra (4%), Brisbane (3.8%), Adelaide (3.5%), and Hobart (1.7%). On the other hand, residential property prices dropped in Perth (-3.3%) and Darwin (-2%) over the same period.
The mean price of residential dwellings in Australia was AU$612,200 (US$429,734) in September 2015, up 10.2% from the same period last year, according to the ABS.
New South Wales, especially Sydney, has the most expensive housing in the country, with the mean house price at AU$780,900 (US$548,152) in Q3 2015, about 30% above the national mean house price. In contrast, Tasmania has the cheapest housing in Australia, at a mean price of AU$321,100 (US$225,396) over the same period.Some critics believe that Australia´s housing market remains severely overvalued.
- The Economist estimated that Australian house prices are overvalued by more than 30% as of Q3 2015.
- According to the Global Real Estate Bubble Index published by investment bank UBS, Sydney house prices are significantly overvalued and at risk of falling in the future. Based on the report, Sydney house prices had increased by about 30% since 2012 while income and rents had stagnated over the same period.
- According to the International Monetary Fund (IMF), housing market risks in Australia remain heightened, especially in Sydney, mainly due to investor credit and interest only loans. House prices are estimated to be moderately overvalued by about 10%.
The continued strength of the housing market is somewhat surprising, since Australia´s economy is estimated to have grown by a modest 2.4% in 2015, after GDP growth of 2.7% in 2014, 2.1% in 2013, 3.6% in 2012, 2.7% in 2011, 2.3% in 2010 and 1.6% in 2009, according to the IMF. However, two factors may partially explain it. The Reserve Bank of Australia (RBA) has kept its cash rate at a record low of 2%, after cutting it by 25 basis points each in February and in May 2015. The other factor is increased purchases of residential real estate by foreign nationals, especially Chinese, who continue to find Australian property very attractive. Proposed foreign investment in the country’s residential real estate market surged to AU$34.7 billion (US$24.36 billion) in 2013-14, up from AU$17 billion (US$11.93 billion) in the previous year, according to the Foreign Investment Review Board (FIRB). China topped the list of real estate approvals, with AU$12.4 billion (US$8.7 billion), twice that of the United States.
Acquisition of residential real estate by foreign nationals and corporations is subject to FIRB approval. Foreigners are not allowed to buy an established (previously occupied) house. They may buy an unoccupied new dwelling, but only if the FIRB feels that the purchase will not add to the shortage of properties available to native Australians.
Rental yields down, rents rising slightly
Rental yields in Australia have hit historic lows, amidst strong house price increases. Sydney saw the biggest decline in rental yields, falling to 3.3% in September 2017 from 3.8% in the same period last year, according to our research. Likewise, yields in Melbourne dropped to 3% from 3.4% over the same period. On the other hand, Canberra yields remained steady at 4.1% in September 2015 while Darwin had a robust rental yield of 5.9%.
Our own yields research for Australia. During the period, the gross rental yield for apartments in Sydney, i.e., the gross return on investment in an apartment if fully rented out, ranged widely, from 2.8% to 5.0%. Small apartments earn significantly higher rental returns than big apartments.
Gross rental yields at record lows and affordability constraints are acting as a further disincentive, particularly in Sydney where the median unit price is equal to, or higher, than the median house price in every other capital city.".
During the third quarter of 2017, the average rent in Australia’s major cities rose by a meagre 0.5%. Darwin suffered the largest annual decline in rental rates of 11.4% in Q3 2017, which was followed by Perth (-5.8%). On the other hand, Melbourne and Sydney saw the biggest annual rental growth in Q3 2017, at 2.1% and 1.9% respectively. Minimal annual rent increases were also seen in Hobart (1.5%), Canberra (1%), Brisbane (0.5%), and Adelaide (0.1%).
A lot of investors are looking at capital growth potential, rather than rental returns, that can be successful when properties are climbing, but over the long term, you need some sort of rental return. A lot of properties in Sydney and Melbourne especially don’t currently have that potential.
Key interest rate on holdThe Reserve Bank of Australia (RBA) kept the official cash rate unchanged at a record low of 2% in December 2017, after cutting it in February and May 2015, in an effort to support borrowing and spending amidst a slowdown in the mining sector.
“Monetary policy needs to be accommodative,” said the RBA. “Low-interest rates are acting to support borrowing and spending. While the recent changes to some lending rates for housing will reduce this support slightly, overall conditions are still quite accommodative.”As a result, interest rates for housing loans were also at their historic lows:
- The average standard variable interest rate for housing loans was 5.65% in December 2017, unchanged from the previous month but down from 5.95% in a year earlier.
- The average discounted variable interest rate for housing loans stood at 4.85% in December 2017, unchanged from the previous month but down from 5.1% in a year ago.
- The three-year fixed interest rate for housing loans stood at 4.45% over the same period, unchanged from the previous month but down from 5.1% in a year ago.
“Growth in lending to investors in the housing market has eased. Supervisory measures are helping to contain risks that may arise from the housing market,” said the central bank.
Mortgage market continues to grow
The Australian mortgage market has grown from around 15% of GDP in the 1970s, to 58% of GDP in 2002 and finally to around 95% last year, thanks to low-interest rates.