Big Brother is casting a long shadow over Auckland's housing market for Chinese investors

By Greg Ninness

This could be a volatile year for the residential property market, particularly in Auckland and one of the big uncertainties hanging over the market is whether Chinese buyers will return to the market in any significant numbers this year.

Over the last few years they were a major force in Auckland’s residential property market and their presence added fuel to fire that heated up the region’s rapidly escalating house prices.

But when new rules were introduced on October 1 last year requiring anyone buying or selling virtually any property apart from their own home, to have a New Zealand bank account and obtain an IRD number, ethnic Chinese buyers rapidly disappeared from open homes and auction rooms and their absence had an immediate impact.

The number of Auckland properties being sold under the hammer at auctions declined and so did the REINZ’s median house price, which dropped from $771,000 in September last year to $748,250 in October, before climbing back up to $765,000 in November and finishing the year at $770,000, just $1000 shy of September’s record high. However, in January it slumped to $720,000, putting it back to where it was in April last year.

While it’s unlikely that all of that movement could be attributed to Chinese buyers, anecdotal evidence suggests their considerably reduced presence in the market would have been a significant factor in that price volatility.

Can we assume they will return?

Most of the people I have spoken to in the property industry have had the view that Chinese buyers will eventually will come back.

Their broad view is that the Chinese buyers will eventually get their paperwork in order and adjust to the new regime and return to the auction rooms with renewed vigour.

I don’t think we can assume that will be the case.

There has been talk around the traps of a backlog of applications for IRD numbers and delays in these being issued, and this has been blamed by some in the market for the reduced numbers of Chinese buyers.

But that is not the case.

IRD says it aims to have applications for IRD numbers processed within 10 days and it is currently processing them within five days and urgent applications can be processed on the same day.

From October 1 2015 to the end of January this year, IRD had received 106,922 applications for IRD numbers and had issued 94,265 IRD numbers.

Of those, 67,211 were issued to individuals and these were almost equally divided between NZ residents (34,177) and overseas or non-resident individuals (33,034).

Another 27,054 IRD numbers were issued to other entities such as companies or trusts and the vast majority of these (26,830) were entities resident in New Zealand with just 224 of them based overseas.

However that does not mean all of these IRD numbers have been issued to investors lining up to buy property.

The numbers include all people and companies applying for IRD numbers, such as young people starting work, migrants and new businesses.

And although the number of IRD numbers issued between October and January was well up on the same period a year earlier, that number had been growing dramatically for several years before the new rules for property investors were introduced.

In the four months from October 2012 to January 2013, IRD issued 66,987 numbers, in the same period of 2013/14 that had increased to 86,577 and by the same period of 2014/15 it was 89,871.

So against that trend, the 94,265 IRD numbers issued from October 2015 to January 2016 does not look unusually high.

If investors need an IRD number they should be able to get one within a week or two and if they are staying out of the market and not applying for IRD numbers, there must be another reason.

Part of a bigger picture

What the people I have spoken to don’t seem to have taken account of is that the requirement for property investors to have a New Zealand bank account and an IRD number is only part of a bigger picture.

As well as having to have a New Zealand bank account and IRD number and providing these to IRD (via a Land Transfer Tax Statement) when buying or selling property, buyers and sellers must also provide their taxpayer identification number from any country in which they are required to pay tax on their international income.

That will assist the sharing of information between the IRD and tax authorities in other countries, including China.

While that will assist tax authorities both here and overseas to collect any tax that is due as a result of the sale of a property, the information could also be of particular interest for Chinese authorities for other reasons.

The Chinese government is trying to stem a torrent of money leaving that country and enforce rules which limit how much money Chinese investors can send overseas to places like New Zealand.

At the same time they are also waging a fierce campaign against corruption.

So the information sharing arrangement with IRD could be helpful to Chinese authorities on a number of levels.

Getting caught for not paying tax on an overseas property they sold or for sending money out of the country by unconventional means to buy it, may be a risk that some Chinese investors would be prepared to take.

But questions about how the money was transferred could also lead to questions about where the money comes from, and those inquiries could extend to other family members, friends and colleagues.

If the Chinese Government’s crackdown on capital flight has been vigorous, its clampdown on corruption has been ferocious.

In China, Big Brother has a reputation for being heavy handed.

If you have not been playing by the rules, you do not want him knocking at your door.

So while some investors from China may not have been too concerned about giving their details to New Zealand tax authorities, the possibility of having their dealings scrutinised by authorities back in China could be a greater worry for some.

The same safe bet?

The other factor that may weigh on overseas investors’ minds this year is that Auckland property may not seem to be the same safe bet it was over the last couple of years.

If someone’s main motivation for buying an overseas property was to get money out of their homeland and park it somewhere safe, they may not be too concerned if it produces a negligible income return.

In a rising market they may even be happy for it to sit vacant and watch it appreciate in value.

But what if there is a risk that prices could fall?

When the herd is in full flight, it doesn’t have to actually see a lion to turn on its heels.

A rustle in the undergrowth may be enough to spook it.

And last month we had just such a rustle when the REINZ’s median Auckland price dropped by $50,000.

A price drop in January is not unusual but a price drop of that magnitude was worrying.

It doesn’t mean that the market has crashed or that prices will keep falling.

But what is has shown is that they can fall, and might again.

The Auckland market is not as invincible as many had believed and that creates uncertainty.

While the motivation for many Chinese to get money out of their country is undoubtedly still strong, concerns about the ability of Chinese authorities to scrutinise their transactions and uncertainty about the robustness of our economy and the housing market could see many of them deciding New Zealand isn’t worth the risk, and start to look elsewhere.

The links between New Zealand and China are now so strong that buyers from China are likely to be a feature of this country’s housing market for the foreseeable future.

But people hoping they will return in the same numbers and with the same enthusiasm they showed over the last few years, may be disappointed.

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