Are the Chinese buying properties in drove?

Ross Greenwood speaks to Martin North from Digital Financial Analytics, about a Credit Suisse report that suggests foreign buyers, almost all from China, are purchasing 25 per cent of new homes in NSW

Introduction: Are the Chinese buying properties in drove?

Ross Greenwood: One thing that’s also important is after this week having found out that house prices in many parts of the country are falling and in particular in Sydney which has led the property markets higher over a very long period of time. Even though quite clearly now it seems that Melbourne has overtaken New South Wales and Sydney in terms of house price growth. But one point also, with new surveys out from Credit Suisse is that it’s suggesting that Chinese buyers are picking up one in four new properties in New South Wales. Now think about that, one in four brand new properties that are being built is being bought by a Chinese owner. Now, this comes at the same time that you’ve seen a big snapshot come out, somebody’s been watching this and just seeing the trends that are coming in house prices and what happens in the medium and long-term. Some people are saying, “The whole thing’s in a crash.” Other people saying,”No, it’s going to keep going.” Martin North from Digital Financial Analytics, who watches the banks and all of these credit markets very, very closely is on the line right now. Martin many thanks for your time.

Interview With: Martin North, Digital Financial Analytics

Martin North:  Hello?

Ross Greenwood: Did you give credibility to that report from Credit Suisse that it could be that one in four new property buyers could be Chinese?

Martin North:  Well, in some areas, in some suburbs it’s quite likely because essentially what’s happening is that we’re seeing high-rise construction for example, in all around some areas of Sydney and Melbourne up in Brisbane. Those high-rise units are being built by Chinese funded builders and sold directly up into China. In fact, quite a lot of them will have Chinese websites and will be attracting buyers direct, of course, they can actually get a single investment approval and then effectively bring the investors in. In some host codes, I think it’s probably pretty high, in others it’s much, much lower and I also think we’re another trend and that is the high rollers that are still up there in China are also buying up some of the bigger houses as well. I think it’s a really mixed picture and I don’t think it’s but I do think there are some significant trends and it’s no doubt in my mind that the Chinese sector is supporting the house price growth at the moment.

Ross Greenwood: I thought one thing Martin was that given the fact there had been capital controls put in place by the Chinese government to try and prevent their own nationals sending money overseas. Given also that there have been a clamp down here in Australia about local banks and lenders giving money to Chinese borrowers who did not properly qualify according to Australian standards. I’m not saying Chinese standards, I’m saying Australian standards. I thought both of these factors were supposed to slow down significantly the amount of Chinese buying in their markets.

Martin North:  Yes. Well, two things happened. Firstly, there was a significant proportion of positive existing properties and that’s being clamped down on pretty hard now. Effectively, it’s a newly built property rather than existing but whilst there have been some controls, it’s clear to me that it is still feasible to get money coming down this way formally or informally, often perhaps using relatives and other mechanisms. If people really want to do it, they can and think of the quantum we’ve got such a large population up in China even if it’s a relatively small proportion of people thinking about buying down here, they’ll still swamp the local market here. They’re definitely putting some sort of support under home priorities. The question is, will it continue and what will be the long-term impact?

Ross Greenwood: That being the case while those Chinese buyers continue to come and let’s be honest we know with the very big increase in tourism coming to Australia and everybody understands, if you go on holiday somewhere you look in the real estate agency windows and basically try and figure out what the price is like. Would it be good to buy? Would it not be good to buy? That’s going to be happening with many of these Chinese tourists coming to Australia. That being the case as you point out, so long as I can get the money to Australia, it almost underpins if you like despite some of the trends that we’re apparently seeing in the property markets. It almost underpins the prices and the values.

Martin North:  Well, in some places, some places like Wolli Creek and Hurstville for example, in and around Sydney. There would be areas where the high-rise development is definitely being supported by Chinese purchases. In other locations not the same, I think it very much depends on where precisely you look. Of course, the other point is, if the Chinese currency devalues that could be the signal that this could then stop because effectively the huge value great gains that are currently available to those particular investors might seek.

Ross Greenwood: The reason for that is, we should also explain to people because, in Chinese currency terms, Australian housing has been astonishingly cheap by virtue of the very strong Chinese currency as against the Australian dollar.

Martin North:  Yes, that’s right. Even if there were no capital gains here in Australia, the movement relative of the two currencies means that they’ve actually made a 20% to 25% gain.

Ross Greenwood: Okay. Then come back to the snapshot of the Australian property markets. They’re influenced by population, by interest rates, by wages growth, by Chinese buying, they’re influenced by the willingness of the banks to lend. All these types of things come together to give a picture of the way the property markets go. Ultimately, whether the banks are prepared the lend is the key because they’re the ones carrying risk on their balance sheets.

Martin North:  Well, they are for local borrowers, I think some of the overseas purchasers don’t actually tap into the local banks now here. They’re actually getting money from overseas but certainly locally, you’re seeing investors now finding it much, much harder to get those investment loans. Around 20% of investors according to our surveys, couldn’t get the funding that they wanted to go by previously they go away to get funding. It’s clear to me that investors are finding it much more difficult because the underwriting standards are being tightened and a whole bunch of other things have happened. First-time buyers, of course, are quite active at the moment, that’s partly because of the new grants that are available. The thing about that is, the first-time buyers are buying in to my mind at peak price. There is some significant risk of people going to the market now. My own view of is that all probably in the mix and think about it and think about where interest rates might go, I think we’re going to see prices drift lower rather than continue to climb. I suspect that even a small rate rise or even a small external shock could tip the market strongly negative.

Ross Greenwood: I’ll tell you what’s interesting to watch that as well. Martin North from Digital Financial Analytics, the banks also will keep it a hawk-like eye across a lot of that because they’re the ones who would actually suffer the consequences. If as Martin says, they were to be a sharp fall in prices if interest rates rose. Martin North from Digital Financial Analytics. Always great to have you in the program, Martin. We appreciate it.

Martin North:  Cheers.

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