If you thought Australia’s property market was nearing its peak, you may want to revise your opinion. Aussie real estate stands to profit from an influx of overseas investment as China’s capital markets liberalise. This comes according to Colonial First State chief economist Stephen Halmarick. Here’s what he had to say:
‘What will really matter for the world is how China opens up to allow its people to send money offshore. Australians might think they’ve seen a lot of investment in Sydney and Melbourne property market, but we ain’t seen nothing yet’.
We may not have seen anything yet, but this conclusion is nothing new.
After all, there’s a good chance you’re already well aware of the impact Chinese investors are having. If you happen to live in Sydney, you’ll know all about it. Some economists have made Chinese investors the scapegoat for rising house prices.
There’s also been a lot of noise about the oft-quoted $60 billion worth of Chinese investment. That’s the amount Chinese investors expect to inject into the local real estate market by 2021.
The sums are as vast as they are impressive. And don’t worry about any Chinese economic troubles slowing investment, either. At least, that’s the theory posited by Aberdeen Asset Management’s Nick Bishop. Here’s his take:
‘China is a nation with a huge balance of household savings, because there has been no social safety net. Don’t discount the ability of the Chinese money to flow offshore and push up global asset prices, even if the economy slows down more than expected’.
That may be so, but it still raises two questions for me:
- Do China’s asset bubbles risk flowing over into Australian real estate?
- Is the current stock market correction a hazard or opportunity for Australian homeowners?
Let’s start by tackling the first question.
The risk of Chinese capital
It’s no secret that Chinese investors are upbeat when it comes to Aussie real estate. It’s a win-win situation for them. Australia is a wealthy, westernised nation with global cities on their doorstep. It doesn’t hurt that house prices are among the most expensive in the world— and rising.
Should we worry about capital outflows rising? Well, yes and no.
It would be silly to view Chinese investors as bad if you’re an existing homeowner. They’re clearly not. Anything which pushes up demand, and prices, is a good thing for homeowners.
At the same time, first time home buyers might think differently. After all, it’s natural that non-homeowners would take a more sceptical view of Chinese investors. Some people, rightly or wrongly, feel Chinese investors are partly responsible for a lack of housing affordability.
But I think we should set aside investor preferences for a moment.
Instead, we should consider the reliability of Chinese investments. In other words, how sound is the capital flowing into Aussie real estate? Are these investors good for their word (and money)? It’s not a small concern either. I wrote about this weeks ago. Here’s what I had to say at the time:
‘China’s stock market woes concern observers for a few reasons. For one, what does it say about the future of foreign investment in Australian housing?
‘Chinese developers have invested billions in Australian sites recently. At the same time, retail investors continue to buy up off-the-plan apartments.
‘But with investors struggling on the sharemarkets, should we be worried?
‘We can reasonably expect that many property investors are also playing the stock markets. The broader stock market decline is likely to spill over into other assets. Not only that, but it could jeopardise the state of the Chinese economy as a whole.
‘Anything which threatens the health of the economy could affect the wealth of the average Chinese investor’.
As I wrote at the time, the biggest challenge is from Chinese who already hold investment properties in Australia. Specifically, I’m talking about buyers who have yet to settle on their purchases. Some properties still have settlements at 90% of the their purchasing price. That’s worrying developers in particular.
Investors might look at that and wonder what it means for them. Depending on the soundness of these investments, it could spell bad news. For instance, imagine an entire project falling by the wayside due to an inability to settle purchases. One way or another, market supply would go up as demand flattens. This kind of adverse effect hurts all homeowners.
As Chinese investment increases, the ‘quality’ of this capital will come under greater scrutiny. Really, that’s what should worry Aussie investors more than anything.
What’s more, you only need to look at the stock market turmoil as a sign of how quickly things can go pear shaped.
Are China’s Stock Market Troubles a Gain for Aussie Real Estate?
Chinese markets, as you’ll no doubt know by now, have had a troubled six weeks.
The Shanghai Composite Index rose 150% in the space of 12 months. But within a matter of weeks during June, markets plunged by over 30%.
The government panicked, introducing several pro-investment regulations. They also made it easier for borrowers, lowering rates and reserve ratio requirements for some banks. It’s achieved its aim in slowing down the rot. Markets have recovered by 13% since the government took action.
With capital outflows rising, it could add to investor anxieties.
Why might this be?
Consider the fact that many Chinese real estate investors play the stock markets too. Any issues in one part of their portfolio will affect the rest in equal measure. In extreme cases, it could destroy investors’ wealth in one fell swoop.
And that could leave them without the necessary capital to pay for overseas real estate investments, to name one example.
But how strong is this link between stocks and property? It’s hard to say. The Chinese have traditionally been orientated towards the real estate market. But over the past five years there’s been a dramatic shift towards stocks. There are some 90 million retail investors in China. It’s only natural to assume that some of them invest in Australian property too.
But we still don’t know enough about the Chinese investments in Aussie real estate. That makes it hard to discern their exposure to stock markets. Yet we do know this net will widen in the coming years. As this capital outflow picks up, it will blur the lines between stock and property markets further.
In any case, a China with greater exposure to Australia increases the likelihood of contagion. As it stands, China’s relative isolation is enough to prevent any domino effect. But as this exposure to foreign markets rises, it comes with its own risks. That leaves assets, like Australian real estate, open to fluctuations in China’s economy.
We’ve already seen the nascent effects of this over the past month with the stock market.
Regardless of government regulations, it’s still worrying how quickly things escalated from bad to worse. The Chinese government, alongside the central bank, has further room to manoeuvre. They can prop up asset bubbles for some time yet. But the effects of their actions will lessen in time, particularly if China’s economy worsens.
And, considering Chinese capital outflows will only increase in time, that’s potentially a danger sign for the Aussie property market. Anything that hurts the wealth of the average Chinese investor has the capacity to damage our real estate market.
Whether we like it or not, that’s simply the reality we need to learn to live with.
Contributor, The Daily Reckoning
The Daily Reckoning’s property expert, Phillip J. Anderson, believes that house prices will continue rising. With Chinese investors investing further into Aussie real estate, it’s not hard to see why. In fact, Phil says that property prices are set to continue growing for another decade.
Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He correctly predicted the 2008 housing market crash. He also went against the trend in 2009, saying that house prices would go on to boom this decade.
He was right on both accounts.
In his latest free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.