Owning a residential home is a great Australian dream which is rapidly becoming a distant memory due to drastic increase in property prices. The first home buyers have no respite either. Many are of the opinion that foreign investors who are precipitously acquiring residential properties and pricing locals out of the market.

For Chinese buyers, Australian cities of Sydney and Melbourne are favoured destinations. According to financial services company Credit Suisse, Chinese investors are important drivers of house prices. In 2013-14, they demanded 23% of new housing stock in Sydney and 20% in Melbourne. They will continue to spend an average of $6.3 billion per year to 2020 or 20% of the new homes, up from the current 15%.

Chinese investors are attracted to Australian properties for several competitive reasons: property prices are affordable, sliding Australian dollar, low interest rates, property taxes are low, great Australian lifestyle is appealing and visa requirements are welcoming. Chinese investors are also highly visible in other prime real estate markets of the world including Auckland, Vancouver, California and San Francisco.

Due to recent political noise around the high level of house prices, the Federal Government has promised to introduce legislation into Parliament in the Spring Sittings to strengthen the integrity of the foreign investment framework. The new rules will commence on 1 December 2015. To achieve a stronger enforcement, foreign investment functions in relation to residential real estate will be transferred from the Foreign Investment Review Board (FIRB) at the Federal Treasury to the Australian Taxation Office (ATO). The ATO will apply its data matching capability for a stringent compliance of these rules.

The new regime is contained in the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 and the Foreign Acquisitions and Takeovers Fees Imposition Bill 2015.

In a nutshell, approval is required to purchase a new property by a foreign person or an establish property by a temporary resident such as a student. Temporary residents are not allowed to rent out establish property and required to sell it when it ceases to be their principal place of residence. There are reporting responsibilities by foreign investors, temporary residents and property developers in relation to real estate transactions. The regime includes severe civil and criminal penalties for a third party such as real estate agents for assisting foreign investors to breach foreign investment rules.

Australian taxpayer will no longer pay the bill for screening foreign investment applications and a fee will be levied to foreign investors in real estate. For residential properties valued at $1 million or less, foreign purchasers will pay a fee of $5,000.00. This fee will be increased to $10,000.00 for residential properties valued at greater than $1 million. This fee will then be $10,000.00 incremental fee increase per additional $1 million in property value. There are fees payable by property developers for off the plan certificates.

There are criminal and civil penalties for breaches of foreign investment rules which apply to residential real estate. Criminal penalties will be increased from $85,000.00 (500 penalty units) to $127,500.00 (750 penalty units) or 3 years imprisonment for individuals and to $637,500.00 (3,750 penalty units) for companies. The maximum civil penalties will be greater of (i) 10% of purchase price plus the relevant application fee or (ii) 10% of market value of the property plus the relevant application fee.

Third parties such as real estate agents and property promoters who knowingly assist a foreign investor to breach the rules will now be subject to criminal and civil penalties, including penalties of $42,500.00 (250 penalty units) for individuals and $212,500.00 (1,250 penalty units) for companies.

There are similar high criminal and civil penalties for  renting out or sub-letting an establish property by a temporary resident, not disposing off an establish property by a temporary resident when it ceases to be the principal place of residence, acquiring an establish property by a non-resident or acquiring more than one establish property by a temporary resident, failure to commence construction within 24 months without seeking extension of time and failure of reporting responsibilities by foreign investors as well as property developers.

The new legislative regime with draconian penalties will definitely make Australian real estate less attractive to Chinese buyers but the potential erosion of demand and hence, the price pressures will be marginal. As the credibility of the Australian property market continues to strengthen in China and other Asian countries along with a rising level of income, the level of investment in Australia will undoubtedly enhance resulting an increase in house prices. The liberalisation of Chinese capital markets will inevitably cause huge outflows of funds which will result in a significant increase in house prices in Australia and real estate markets around the world. It would be an illusion to expect a significant fall in residential property prices due to the increased level of regulation and enforcement on Chinese or non-resident activities in the Australian property market.