The Link Between the Chinese and Australian Property Market

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History is busy repeating itself all around the world. Which is another way of saying the same bad stuff is happening everywhere except Australia. Australia’s status as the lucky country is holding as firm as ever. And even the bad news that does come out here doesn’t seem to matter much to financial markets.

Seriously though, what’s the worst thing that’s happened to Australia in the last few decades? We’ve had a bundle of natural disasters. But some economists even reckon they’re a good thing.

More recently, our service sector PMI fell to 48.6 while ANZ’s job ads indicator rose 2.2% in April. Building approvals fell 3.5% for March after a 5.4% fall in February, but are up year on year. Inflation is closing in on the 3% upper target, which is good and bad news at once depending on who you ask. A rate cut isn’t likely anytime soon, especially with the budget proposals discussed so far.

As always, it’s China that makes the Australian share market interesting. HSBC’s manufacturing PMI barely budged to 48.1 yesterday, disappointing the market expectations by a smidge. But the inside story is far more intriguing, as Greg mentioned last week. A Chinese property developer’s extraordinarily bearish speech was leaked.

But now three of Japanese investment bank Nomura’s analysts have officially called the bubble ‘burst’ in public. ‘To us, it is no longer a question of “if” but rather “how severe” the property market correction will be,’ they wrote on Monday. There’s enough discussion of nationalism and racism below to avoid highlighting the fact that a Japanese investment bank was the first to come out with a bearish call on Chinese property.

The analysts also mentioned GDP growth will fall to less than 6% if they’re right about property. If the property bubble bursts, we’d expect a recession in China. Which is apparently a ridiculous idea. Developing economies are supposed to grow, right? Well, remember when the Chinese stock market was a one way bet?


Shanghai Composite Index

Shanghai Composite Index
click to enlarge
Source: Yahoo Finance

If that looks familiar, you’re onto something. Japan’s stock market peaked in much the same way in 1990. Back then, Japan was all the rage and Australia’s source of future prosperity. Australian school kids got stuck learning the language of a country now agreed to be in decline. We’ll never forget discovering our friends had to learn Japanese in primary school. It made us laugh with bewilderment.

So what was special about 1990 in Japan? Well, a certain demographic indicator flipped. The same flip struck Australia and China on the cusp of the financial crisis, which is why our stock markets haven’t recovered. More on that soon.

Back to China. Right now the situation reminds us of Our Man in Havana. The book is about a struggling British vacuum cleaner salesman living in Havana in the 50s. He is recruited by MI6 and feeds them fictitious intelligence information while collecting his imaginary informant’s bribes to fund his daughter’s passion for riding. MI6 ends up with the impression the Soviets are building a gigantic superweapon in the jungle. The plans happen to look like a vacuum cleaner.

China’s economy is much the same in many ways. Their export figures don’t match the corresponding import figures from their trading partners. Their economy is designed to meet targets, not demand. And everything is paid for on credit, driven by the government and lining the pockets of those basking in the BS. Economic policy is about how you can siphon off the most money, not making things people want.

As in the book, it will end badly. Just not for those who caused the problem. They tend to escape to avoid having to uncover how deep the incompetence and corruption goes.

What about Australian property? We’d be in as much trouble as China if our property bubble bursts. But the link between the two countries’ property markets might be even stronger than that.

We’ve told you how overvalued Aussie property is many times. And we’ve never convinced anyone one way or the other on the bubble. So let’s look at something slightly different. What’s going on in the Aussie media coverage of Australian property? More specifically, the pictures the Aussie media sticks on top of their articles about property. To put it politely, they very rarely feature any Caucasians. Unless they’re standing on the front porch holding hands behind the auctioneer.

We don’t have a racist or nationalistic bone in our body, after attending international and local schools in four countries. So don’t misunderstand this as some sort of rant. But what is going on at Australian property auctions? Are there really no Caucasian bidders, or is the media fanning the flames?

To lighten the mood on such a sensitive topic, check out this video on the true nature of Australian racism — the kind we fully endorse.

Regards,

Nick Hubble+
for The Daily Reckoning Australia

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Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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4 Comments on "The Link Between the Chinese and Australian Property Market"

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Jason
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China is following the same declining fertility rate decline patterns as Japan, falling fertility is occuring all over Asia, so China will slowly splutter out like Japan did. Australia, who bowed and scraped to Japan in the 1980’s had now latched onto China and China will succumb to the same demographic decline as Japan. As for call on ‘nationalism’ and ‘racism’ Asia has a huge problem with this, but out doormat, pinko lefty press lacks the balls to critisize Asian racism. The adds on TV for selling houses feature Asians in order to promote the oil-dependent multiculti (i.e the racist… Read more »
ram
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A fair fraction of these “people” (actually cutouts, i.e. actors with false IDs) buying (on terms of nearly 100% credit) Australian property are not genuine. The banks overlook the fraud because it allows them to maintain the fiction of rising prices and that their already bad loans are backed by collateral. Whole regions of the Western Sydney metro area are filled with empty (often never been occupied) new buildings. Where are the tenents? Where are the occupants? Who is paying the loans? A similar level of fraud and empty buildings appeared in Texas before their great real estate crash. There,… Read more »
Jason
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True, I have actually seen this…even in Bondi of all places. Houses and apartments vacant for moths or longer, even commercial properties. When high rents pushed out the hair dressers on Hall Street, Bondi the property remained vacant for over a year.

Harquebus
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China’s customers are broke and have been for quite some time. Getting that through to the growth deadheads has been impossible.

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