Some reality about overseas buying and house prices | Michael Matusik

I have read some BS in my time, but earlier this week an online property portal ran some tripe about how Asians buying Australian property drives local prices down, not up.  I mean, how much property spin we are going to accept?

This Missive’s graphic features four charts.

Chinese Property Buying

The first chart shows the currency exchange between the Australian dollar and the Chinese yuan renminbi (AUD/CNY).

australian dollarThis shows that the Aussie dollar is depreciating against the yuan – a trend which is likely to accelerate into the future, as our dollar continues to fall in value and the yuan moves in the opposite direction.

The second chart shows Sydney’s median house price.  Things started to accelerate in Sydney from late 2012.

The third chart shows the annual change in Sydney house prices based on Australian dollars.

The fourth chart shows us that – when based around the AUD/CNY exchange rate – Sydney house prices aren’t growing that strongly at all.  In fact, they are losing value.

Some background

The Chinese government imposed new restrictions on their domestic real estate sales in 2010 in order to curb rising prices and real estate speculation.

Investment money started to leave China.

Australia, too, in 2010, tightened its foreign ownership laws, prohibiting foreigners from buying existing housing stock for investment purposes.

We allowed foreigners, with no limit, to buy off-plan or newly constructed residential property.ss

Due to growing local concerns, Australia recently convened a federal parliamentary economic committee to investigate our foreign property ownership practices.

The value peak for an investor domiciled in China (and one assumes with assets held in yuan) to buy an Australian (Sydney) investment property was also in 2010 – see charts one and two above – when the Australian dollar was trading well above parity.

Since then, Sydney property prices have been experiencing a consistent fall (in yuan terms), despite the big local gains.

Some observations

There are sound economic reasons why some Chinese investors could walk away from their deposits, especially if the AUD keeps falling & property price growth here slows down or stalls.

But the Chinese usually don’t walk away from their deposits.

Many reportedly leave their properties empty much of the time, so there is not even a rental yield for many.

Free_property_sales_reportIn short, buying an Australian (Sydney house) investment property is a pretty poor investment for a Chinese national.

There is some discrepancy in the overall time line.

Chinese demand here didn’t really get going until late 2012, well after the yuan-priced Australian property commenced falling in value, but in perfect sync with Sydney’s (and Melbourne’s) property run.

Rumour has it that many Chinese investors went to Canada first, as up until recently, Canada had very few restrictions on foreign ownership.

But in 2012, Canada tightened its foreign ownership laws. The USA and the UK also, around that time, made it more difficult for foreigners to buy property and also to immigrate.

Also of import when it comes to timing, is the ascension of Xi Jinping to the Chinese leadership in late 2012, and his subsequent high profile corruption crackdown.

Oh, and for what it is worth, Bob Carr told us that “Sydney was full” more than a decade ago, and low interest rates impact everywhere, so it wasn’t just cheap money and limited supply that ignited Sydney’s property prices in late 2012.

For mine, the real stimulus behind Sydney’s (and Melbourne’s ) recent price growth is a surge in overseas Chinese demand.

This is now spreading to other markets, including inner Brisbane and the Gold Coast.

Xenophobia not

This isn’t an Asian invasion. I am not xenophobic – just look at my surname, I was a “wog” back in my school days (so please spare me the email replies) – but demand from overseas has pushed up local property values.

Real estate in Sydney and Melbourne, in particular, has been de-coupled from the local economy.Sydney property investment

The current ratio of house prices to average incomes in Sydney, for example, is almost a third (31.6%) above the historical average. Ditto for Melbourne.

A lot of the political motivation behind the recent O’Dwyer committee’s report was to help defuse a potential political wedge.

The report concludes that we need more transparency and accountability when it comes to foreign ownership.

I am rarely impressed by anything “government” these days, but I must say that rather than baulking at reform, Ms O’Dwyer and the committee have implemented a sensible and thorough list of recommendations that will add much to our foreign investment regime, and will go a long way to prevent foreign money from being laundered through Australian homes.

Canada’s experience

Canada tightened its foreign ownership laws because it was found that eight out of ten apartments in the more pricey areas of downtown Vancouver, for example, were owned by the Chinese. Most were locked up.

Many of the local shops, restaurants and bars have now closed.

vancouverIn short, it looks like a ghost town…..a bit like the Docklands precinct in Melbourne, from what I understand.

There has been little economic benefit beyond construction to the Canadian economy.

Also, Canadian house prices surged, again far beyond the local market’s capacity to pay, during the surge in overseas buying.

Vancouver, early last year, was the second most expensive place in the world to own a home.

Five years ago it didn’t even make the top 20 list.

Since Canada has tightened its overseas buying laws, Vancouver prices have fallen back.

End note

Let’s not kid ourselves; buyers from overseas (and also interstate, for that matter) pay more for investment property than locals. Often, much more.

Also, Chinese buying here is all about gaining a toehold (many of them think it is a foothold) for later immigration (and who can blame them?), not investment returns; so that being the case, Chinese demand should weather changing market conditions fairly well.

[sam id=36 codes=’true’]

This assumes, of course, that all is well with the Chinese economy, which for mine is as clear as mud.

What would upset the applecart more be would be implementing the O’Dwyer committee’s recommendations. I do think this will be a federal election issue, especially as our economy is just spluttering along right now, and we most likely will need to drop interest rates further to help things along.

Low & falling housing affordability is on a lot of punters’ minds. And whilst overseas buying is only one ingredient to house price inflation, it is top of mind and the public can depict something or someone to blame.

A potential tipping point is the recent China trade deal which allows (with some caveats, for sure) foreign labour to work on foreign owned projects larger than $150 million.

My detractors will say that without the Chinese, we won’t be building that much at all. And as we said in our last Missive, our next major economic thing is all about construction.

We are heavily reliant on China now, in more ways than one. That being said, we must tighten our foreign residential property ownership laws.

Our homes are for Australian citizens first, second and third. We shouldn’t allow our shelter to be used to launder money or as some kind of passport reservation scheme.



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Michael Matusik

About

Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive


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