When the extent of China’s stockmarket turmoil became apparent earlier this month, our beloved property industry ‘Emos’ emerged in their droves to profess the imminent bursting of Australia’s so-called housing bubble.
They foretold that the recent, steady stream of investment activity from our Asian neighbours – particularly in Melbourne and Sydney’s off the plan apartment sectors – was sure to dry up, as many Chinese were rendered poor overnight from life shattering share losses.
But interestingly, it seems the opposite is occurring. As local brokers seize the opportunity presented from a newfound lack of confidence in the Chinese stockmarket, to more widely promote the reliability of Aussie bricks and mortar to overseas buyers.
China crash could hit house prices
In reality, the ripple effects of China’s current economic woes and how they might influence our housing markets here in Australia aren’t quite so black and white.
Some analysts suggest this is “China’s 1929”, when the biggest stockmarket crash in history sent the world spiralling into the Great Depression.
One of my personal favourites appeared in the UK’s Telegraph and read, “The Chinese economy is like one of those cartoon characters who manages to keep running long after leaving the edge of the cliff, only belatedly to look down and plunge into the abyss.”
Let’s all pause for a moment to appreciate that visual! (You saw Wile E Coyote didn’t you?)
Others however, consider what’s happening to our neighbours more of a temporary glitch, not unlike the 1987 crash that saw significant short term falls, but no real lasting fallout.
With regard to the housing sector specifically, the negative implications are twofold…
- More stock in select markets.
One theory is that if China’s economy goes down the proverbial gurgler, so too will its people’s banks accounts. This, in turn, would restrict their ability to finance overseas property investments and potentially impact pockets of our housing markets, where foreign buyers have been particularly active.
- Falling commodity prices will concern overseas wholesale lenders.
With predictions of a much larger crash on the cards for iron ore prices, it’s feared overseas wholesale lenders will start to think twice about financing our banks to keep the mortgages rolling out.
“Banks have to get their money from somewhere to be able to lend to homebuyers,” explains Lindsay David of LF Economics.
“They’ve absorbed everyone’s deposits – if you put $1 in the bank they go and lend that to someone else. They’ve exhausted that, so they go into the wholesale lending market to acquire more funds.
“Real estate prices in Australia depend more on what some wholesale lender in New York or London is willing to lend than anything else,” reasons David. “House prices in Australia are dependent on debt growth, and if there’s no credit out there, house prices will begin to fall.”
This would effectively mean a credit crunch that sees competition dry up and house prices come off the boil.
At the coalface
Anecdotal reports from real estate agents in areas where foreign investment has been prevalent for some time, point to an easing in activity from Chinese buyers on the back of the country’s almost $US4 trillion share market rout.
A number of younger Chinese investors in particular, who never saw the share market crash coming, have been forced to rethink their Australian property purchases and pull out of pending deals.
Overall however, these instances are said to be few and far between.
In fact Michael Pallier, principal at Sydney Sothebys International Realty, said the share market volatility was encouraging more Chinese interest in local, luxury end real estate.
“Last month in our office we sold 20 properties for $115 million turnover in June, of which 25 per cent were sold to Chinese buyers.”
Pallier says many of their wealthier Chinese clients had pulled out of the share market before it imploded, and with the fortuitous drop in our dollar making our rising property sector even more accessible and appealing, these savvy investors are now busy, redirecting their salvaged fortunes into Aussie housing.
Seeking shelter from the sharemarket storm
It’s not just Australian real estate that’s finding favour with Chinese investors looking for a safe haven from the stormy Shanghai equity markets, but Canada and the UK too.
Pallier’s claim that the bulk of ‘real money’ had already been removed from danger prior to the economic calamity over in China, is supported by reports from Bank of America Merrill Lynch.
It claims that major shareholders in China had already sold 360 billion yuan ($58 billion) in the first five months of 2015, compared to 190 billion yuan for all of 2014 and an average 100 billion yuan in prior years.
“There is anecdotal evidence that Chinese buyers have intensified their interest in ‘safe haven’ global property markets, including London, as a result of the recent stock market volatility,” said Tom Bill, head of London residential research at Knight Frank.
And according to experts, this is only the beginning. With more interest expected from these cashed up and insightful Chinese investors, as Australian made real estate gains more of an international market edge due to a weaker currency exchange.
Of course for local investors with a clear game plan, it’s business as usual.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).