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While many factors led to the booming property markets in Sydney and Melbourne over the last few years, there is little doubt that foreign investment, particularly Chinese investment, drove certain sectors – the off the plan new apartment market.
Well…the tide may be turning.
Australia is uniquely vulnerable to China’s economic downturn and foreign demand for Australian residential property has slowed in 2015 as Chinese consumers tighten their purse strings according reports in Fairfax Media attributed to Credit Suisse analysts Damien Boey and Hasan Tevfi who report:
“Chinese demand for global property could fall by 30 per cent” this year
“Chinese bidders have reportedly been less active in foreign property markets” since the August devaluation of the yuan, the analysts say.
The key factor driving reduced Chinese demand for foreign bricks and mortar is not tighter capital controls, but the less confident and wealthy Chinese consumer.
“The underlying issue is weakness in the Chinese economy.
“Capital flight is tightening credit conditions, which in turn is dampening income growth, wealth and the purchasing power of Chinese residents.”
Last week a NAB residential property survey suggested foreign buyers represented around 16 per cent of all new home sales in the three months to the end of September, compared to 12.8 per cent for the previous quarter.
Similarly CBRE figures show Australia has continued to increase as a destination targeted by Chinese investors, with market share increasing from near zero in 2008 to 25 per cent of capital flows in 2015.
While that figure is for commercial, not residential, property, Credit Suisse said it was an appropriate guide, showing Chinese interest in Australian property was “grossly disproportionate” to Australia’s share of global GDP.
An increase in allocation to Australia followed regulatory changes abroad, with Canada tightening visa rules and Hong Kong and Singapore raising taxes on foreigners purchasing property.
Credit Suisse analysts said the slowing housing market would require further rate cuts.
Unsurprisingly, Australia is particularly vulnerable to being impacted by China’s economic turmoils and the final effects on Australia’s economy and our property markets are uncertain.
Troubles in China could mean that a likely destination for Chinese capital was the Australian property market continuing to underpin the off the plan property markets.
However at the same time they could have a negative impact on our general economy that has been counting on China for trade.
More details of the Credit Suisse Analysis:
From Credit Suisse:
Shortly after the devaluation of the RMB/USD in August, many anecdotes emerged that Chinese property buying in developed markets had slowed.
The consensus view is that Chinese capital controls became much stricter, making it more difficult for Chinese residents to fund purchases abroad.
However, this view is hard to reconcile with the balance of payments data, which suggests that the pace of capital outflow from China has actually accelerated in recent months.
Also, we note that capital controls can be bypassed through foreign currency borrowing.
From an Australian perspective, we suspect that the anecdotes are accurate.
Over the past few months, there has been a significant decline in auction clearance rates in Sydney and Melbourne (two of the more popular destinations for Chinese) to the low 60s from the high 80s.
The declines cannot be explained by macro-prudential tightening alone.
We have also seen home-buyer’s sentiment fall sharply, as if:
- There has been a negative shock to affordability and credit availability.
- The missing “cashed-up” foreign buyer has somehow caused (leveraged) property investors to revise down expectations for capital growth.
- To be sure, there are still reports in the media that Chinese buyers are present in the market, and that new efforts are being made to attract Chinese money.
Our thesis is not that Chinese buyers have disappeared from the market completely.
But the weight of evidence suggests that at the very least, there has been some cooling of Chinese interest in recent times, off an historically high level.
The limited data available suggests that Australia could have experienced a significant pull-forward of Chinese demand over the past few years.
…we suggest that the Chinese consumer is cyclically weak because the economy is struggling with exchange rate overvaluation and capital flight.
It is the cyclically poor condition of the Chinese middle-to-upper-class which is driving the slowdown in property buying abroad.
Leading indicators suggest that the slowdown has further to run globally.
Even a flattening out of Chinese buying of Australian property is bad news for the housing market because supply is rising, and locals are being shut out of the market by macro-prudential regulation and poor affordability.
The housing market slowdown in train will probably require policy makers to ease financial conditions further.
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