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Australia risks housing correction with foreign buyer tax hike

* Foreign buyers to pay 8 pct surcharge on Sydney purchases

* Chinese investors alienated as cracks appear in property market

* New apartment developments seen most at risk

* Developers say market can withstand any investor pull-back

SYDNEY, June 14 (Reuters) - Soon after Australia's New South Wales state announced it was doubling the tax for foreigner home buyers earlier this month, calls started flooding in to Sydney-based real estate agent Shan Lin.

"My phone never stopped, I charged my phone three times, no kidding - overseas clients, overseas agents, my channels in China," said Lin, who deals mostly with Chinese-based investors.

"They definitely feel the pressure. They say, 'Shan, look, I will not consider investing in Australia or investing in Sydney'."

Chinese property investors are turning their backs on Australia as a series of measures designed to cool one of the world's hottest real estate markets targets foreign buyers, raising the risk of a damaging correction in house prices.

Australia's latest move follows similar measures imposed in other favoured destinations for mainland Chinese including Vancouver, Singapore and Hong Kong.

But there are fears the Australian measures have been introduced into a frothy market already showing signs of stress.

Sutono Pratiknya, a Sydney-based sales consultant, said the changes sent a clear signal to his overseas investors they were not welcome.

"We used to do five property tours a month, picking up a dozen investors from the airport and showing them our latest offering," Pratiknya said. "Now, there's nothing."

With Australian banks heavily reliant on mortgages, economic growth slowing, and the Reserve Bank warning about households groaning under record amounts of debt, any sharp fall in house prices risks derailing Australia's record 26 year recession-free run.

New South Wales' new tax arrangements will see duties from home sales to foreigners rising to 8 percent of the purchase price, taking total taxes on overseas buyers to more than 13 percent.

SPEED OF CHANGE

While Australia is not alone in introducing foreign property taxes, the number and speed at which new policies are being imposed is spooking foreign buyers.

In just over a year, all major east coast cities have introduced and, in the case of Sydney, expanded foreign duties; the country's biggest banks have stopped lending to overseas buyers; and the federal government has introduced punitive measures for foreigners who leave properties vacant.

Foreigners will also lose a capital gains tax exemption for their primary residence in changes unveiled in last month's national budget.

Big apartment developments are most at risk, given foreigners are restricted to buying "off-the-plan" and newly-built homes under Australian law.

Foreigners account for a quarter of new housing sales in New South Wales, according to a Credit Suisse report, with Chinese investors by far the biggest buying group.

"The fact is that a lot of developments hinge on foreign investment," said David Bare, the NSW executive director at the Housing Industry Association. "Applying these measures when the market is starting to cool is going to have a much greater effect than it might've 12 or 18 months ago."

Sydney home prices, after doubling since 2009 to top A$872,000 ($658,000), recorded a rare fall in May, according to property consultant CoreLogic. Auction clearance rates - a key indicator of demand - have also been slipping as an abundance of new homes hit the market.

Meriton Group, Australia's largest apartment developer, is expected to be impacted given it has a cluster of new Sydney developments targeting Chinese buyers.

"Its connections into China are deep, but trying to sell to foreigners in this market is like swimming up a waterfall," said one property investor close to the company who declined to be named.

Janice Jiang, a Meriton sales consultant in Sydney, said the company made about half its sales to foreigners, and that the extra taxes would have little impact in the long run.

Meriton's founder, billionaire Harry Triguboff, declined to comment on the impact of the tax hike.

BUST OR ROBUST?

At development sites scattered throughout Sydney's tony northern suburbs and sprawling west, showrooms have signs in Mandarin and offer Asian sweets, in addition to coolers full of Australian wines, seeking to tempt both foreign and local buyers.

At one showroom for a 38-apartment development called Emerald Epping, sales agent Henry Wong said most customers might appear Asian, but were often from families who migrated a generation or more ago.

Some developers say such domestic sales are robust enough to fill any gap left by foreigners, especially given extra government help for first-time home buyers.

"We are OK with this, our business model isn't relying on massive investment from overseas purchasers and for first home buyers, it's the right decision," said Jay Carter, sales and marketing director at Poly Australia, a subsidiary of Chinese state-controlled Poly Real Estate Group Co.

Art Yang, chairman of Gasheng Overseas Investment Group based in China's Guangzhou, said the new taxes would not impact very wealthy Chinese buyers, but would hurt investors borrowing to buy property.

Many are being advised to look elsewhere.

"It seems like the tax increases are never-ending," said Esther Yong, a director of Chinese property agencies Sodichan and ACproperty. "I have buyers who were looking at Australian property and agents in China convinced them to buy in the U.K. instead." ($1 = 1.3245 Australian dollars)

(Additional reporting by Clare Jim in HONG KONG and Clara Ferreira Marques in SINGAPORE; Editing by Lincoln Feast)