The NSW Treasury was warned that hefty new taxes on foreign investors could have a "large negative impact" on investment in Sydney's real estate.

The warning, part of an expert report obtained under a Freedom Of Information request, also suggested that the new taxes would have negligible impact on Sydney's house prices, as foreign investors account for just 5 per cent of residential sales.

Since July 2017 foreign buyers - mostly from China - have paid a stamp duty of eight per cent and from this year will also pay an annual two per cent land tax on their properties.

The new taxes were announced in a sweep of reforms to help first homebuyers aiming to boost affordability, in part by charging foreigners extra for property.

Shattering the myth of phantom apartments

For years, foreign buyers have been accused of leaving thousands of luxury units uninhabited, worsening the housing shortage, and raising prices.

Paying their way - Treasury's data on foreign buyers 4,000 – 5,000 foreigners make purchases each year - around 3-5 per cent of sales

4,000 – 5,000 foreigners make purchases each year - around 3-5 per cent of sales Each paid on average $113,333 in duties and fees for a property

Each paid on average $113,333 in duties and fees for a property Around 75 per cent buy properties 'off-the-plan' in new developments

Around 75 per cent buy properties 'off-the-plan' in new developments Independent modelling shows the new taxes will reduce Sydney's prices by less than 1 per cent

Some analysts have claimed up to 20 per cent of foreign purchases are phantom apartments, sitting idle with the power, gas and water disconnected.

But the Treasury expert report shatters those claims. A break-down of electricity and water data finds that "properties with low or no usage comprise around one per cent of properties in Sydney".

In suburbs popular with foreign buyers, such as Chatswood, the expert report found vacancy is even lower - a miniscule 0.6 per cent.

The report blames a shortage of supply, and domestic population growth for rising rents suggesting that most foreign-owned apartments are already rented out.

Foreign buyers have been accused of leaving thousands of luxury units uninhabited over the years. ( Brandon Griggs on Unsplash )

The Vancouver precedent

Vancouver's booming property market is cited as a precedent for policy-makers to consider.

In 2016, as prices climbed, Vancouver's affordability became a social issue. Facing political pressure, the city's officials stung foreigners with a 15 per cent stamp duty — the world's highest.

Foreign investment fell rapidly - by almost 90 per cent - and over six months house prices dipped five per cent.

The overseas investors flooded into neighbouring Toronto, where prices surged, and new developments blossomed.

As an affordability measure, the tax was ineffective, because Vancouver's prices rebounded, and are now 10 per cent higher.

Is Sydney staring down an investment tipping point?

The expert report, delivered last January, cautions the NSW Treasury that the new taxes could also trigger a "tipping point", where investors avoid Sydney and chase gains elsewhere.

It says as foreign buyers cease to purchase "off-the-plan", and land taxes increase, it may become harder for developers to buy sites and raise capital through pre-sales, "enabling developments to come to market sooner".

The report also notes that foreign developers, who spend millions on land and development sites, are also subject to the hefty new taxes. It warns this investment may shift to other parts of Australia.

A drop in "off-the-plan" sales could therefore trigger a drop-off in housing supply, and perversely, even less affordable housing.

Ominously, the authors conclude that "we do not know enough about international investor demand to assess this".

Weighing up the long-term cost of a sales slump

In a separate briefing note, obtained by the ABC, a Treasury official predicts that a slump in sales - linked to the new surcharges - may cost the Government over $1 billion in future revenue.

Treasury data seen by the ABC backs that view up.

It reveals that in June 2017, foreign buyers purchased 4,000 homes in a race to sign contracts and avoid the eight per cent duty.

In July, when the new tax finally hit, sales nose-dived to just 70.

This year's budget papers acknowledge that foreign investment is falling, predicting just 2,000 foreign purchases in 2018-19Qtion.

Questioned about the falling levels of foreign investment, a Treasury spokesperson said the market impact was "relatively small".

The spokesperson said that commercial operations were not affected.

"Developers are exempt from the surcharges, provided they sell developed properties to the market."

Confusion over who is a foreigner

The expert report also points to exemptions to the new taxes, as not everyone who lives overseas is classified as a foreigner.

Many foreign passport holders are exempt from the surcharges, for example New Zealand citizens, foreigners married to Australian spouses, and holders of permanent-resident visas, all whom may live and earn income overseas.

All are free to invest with the same rights as Australian citizens, and don't show up in government data. The report notes some cities, such as London and Singapore take a tougher stance on non-resident investors, subjecting them to higher rates of stamp duty and capital gains tax.

The Commonwealth, through its Foreign Investment Review Board and APRA, also have powers to change fees and borrowing rules which also influence foreign investors.