THE Federal government will scrap its controversial new rules on foreign investment in real estate, and instead tighten both the rules and their enforcement to head off a damaging political storm.

In a stunning about-face, Assistant Treasurer Nick Sherry has announced that temporary residents will now have to seek approval from the Foreign Investment Review Board (FIRB) to buy any real estate in Australia.

Temporary residents will also be required to sell their Australian property when they leave Australia. And for the first time, the FIRB will be given the means to ensure that the laws are enforced.

In a surprising move, the crackdown will also target vendors and real estate agents. Senator Sherry said they would face civil penalties if they were involved in transactions that breached the Foreign Acquisitions and Takeovers Act. His spokesman could not explain how vendors and real estate agents are expected to know the immigration status of buyers.

The move comes barely three weeks after Senator Sherry denied that foreign investors were a factor in the Australian real estate market.