China’s brewing stock market correction has left investors with a big headache. Should investors stay in the game and risk the market worsening? Or does it make more sense to divert investments into other assets?
Some will have no doubt made up their minds already. Chinese stock markets have shed over $3 trillion in capital in the space of a month. That’s enough to worry even the most optimistic of investors.
Just last week, China’s central bank made their decision even easier. They announced a 0.25% cut to the official interest rate. That’s the fifth rate cut over the past year. The government also eased capital requirements for a number of lenders.
That leaves real estate in a prime position to soak up the capital flowing out of stocks.
The Chinese are seasoned real estate investors
For over a decade, real estate in China boomed in line with the rise in construction. The rush to accommodate rural migrants led to staggering property price growth. Shanghai alone saw prices rise by 600% between 2001 and 2011.
But the start of this decade saw a shift in the government’s approach.
Property was shelved as part of a broader move to promote stocks. The concern was that the housing market was overheating.
In order to lift some of the pressure off real estate, stocks became the go-to asset. The outcome of this has been a tripling in the value of sharemarkets in just three years.
But with stocks falling, housing could assume a more prominent position across portfolios. Yet it’s not just Chinese real estate that will benefit from this.
Equally, this development could play directly into Australia’s hands. Why?
Chinese investment in Australian property continues to grow year on year. And it shows no sign of slowing down.
Some already speculate that Chinese investors are primarily responsible for rising house prices. Yet the extent of these concerns seems exaggerated.
Nonetheless, there’s little doubt Chinese investors have played some part in pushing up prices.
If this trend continues, a renewed focus on real estate in China could be a major boon to Australia.
Or it may have no visible effect at all. It really depends on what school of thought you subscribe to.
The pessimistic outlook
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.
That could lead many investors to hold back on investing in Australia.
But the bigger problem may come from existing investors. These are buyers who have committed to buying, but are yet to settle on their purchases.
The soundness and quality of these investments will come under greater scrutiny. Developers are already concerned that investors will be unable to settle their investments.
For now, the assumption is that investors will make good on these investments. But the risks are potentially devastating to developers. Some properties still have settlements at 90% of the their purchasing price. It doesn’t bode well for developers who find themselves in that situation.
Developers are also anxious about the stock market’s effect on the broader Chinese economy. Some are bringing projects forward ahead of schedule in response to this. They want to push these developments out as soon as possible. Otherwise, they fear that Chinese investment will come to an abrupt stop.
All of these concerns are valid. And they will no doubt affect developers holding bad investments. But the extent of this may be overstated. Let me explain.
The optimistic outlook
The Chinese stock market correction is a potential boon to Australia’s property market.
China is currently the single largest foreign investor in Australian housing. The FIRB approved almost $12.5 billion worth of Chinese investments in 2014–15.
This figure is still relatively small compared to the total real estate market. But the overall trend is one of rising Chinese investment in Australian housing.
Chinese investors are set to pump over $60 billion into Australian real estate by 2020. Granted, most of this investment will be confined to Sydney. But it nonetheless represents a substantial amount of foreign investment.
If prices start to cool in Sydney, then Brisbane could be in line to benefit. Median house price growth in Brisbane will outpace the national market up to 2018.
There’s every good reason to believe that investments will keep flowing in.
Just look at the Aussie dollar. It fell below $0.75 this week. The good news, for real estate at least, is that the dollar is expected to keep falling. Economists are now saying that it could reach a floor of $0.65 by 2017.
This is significant because it makes foreign investments cheaper. Chinese investors will find Australian real estate an increasingly affordable investment option.
If China’s economic situation deteriorates, then foreign investment levels are likely to stall.
Despite that, investors buying Australian property are typically wealthier than the average Chinese stock investor. That may suggest the stock market will have little bearing on future real estate investments.
After all, there’s no doubt that the property market will benefit as the stock market crashes. That applies to both the Chinese and Australian market.
But the correction we’re seeing should spill over positively into Aussie real estate. Unlike China’s real estate market, Australia has lots of potential for growth.
We don’t have the problem of oversupply to the extent that China does. House prices in Sydney and Melbourne continue to show double digit growth. By contrast, prices across major Chinese cities are trending downwards.
All this bodes well for Aussie real estate. The net effects of a Chinese stock market crash could prove to be a major boost for our market.
Contributor, The Daily Reckoning
PS: The Daily Reckoning’s property expert, Phillip J. Anderson, is bullish on real estate. He feels that it’s still a long way from hitting its peak. In fact, he believes the current boom we’re in will last for another decade.
Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for the state of the property market.
He 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.