Chinese capital inflows making and breaking Australia’s housing market

Analysis by Credit Suisse shows that foreign investors accounted for 25% of new housing in New South Wales, 17% in Victoria and 8% in Queensland. The analysis suggests almost 90% of this demand is from China. Credit Suisse’s research found that foreign buyers are pouring an annualised $5.9 billion into residential property in NSW, $3.4 billion in Victoria and $700 million in Queensland.

With the average price of dwellings softening for the first time in two years, and new approvals relatively soft also, it may be that the impact of strong foreign investor demand will keep both higher than would otherwise have been the case.

The chart below shows residential purchases by foreign buyers over the last four quarters.

fig 21

We are not inclined to stoke any sentiments regarding foreign investors, but the facts, as displayed in the chart below, are that Australia’s overseas property investors are primarily from China.

fig 22

Beyond China, we can also observe that Indonesia is a growing source of foreign investment in residential property. What marks the Asian investors out is that the dwelling formats with which they are more familiar – in the main – are smaller and taller than the current Australian norm.

It is money from the new world that drove at least part of Australia’s strong demand for dwellings, and probably, that kept its prices high for quite a while.

The Credit Suisse research shows a tight correlation between funds inflows from China, and Sydney’s house prices. As Chinese capital inflows have declined, the Sydney property market has experienced falling prices and demand.

Without overdoing the interpretation of data, the following chart – which includes some correlation related manipulations – shows the relationship between property transfers and Chinese capital flows.

fig 23

Accordingly, puffed somewhat by Chinese funds inflows, local buyers have chased prices up. That may be the reason Sydney has experienced significant price increases. So, prices are up and at the same time, demand is falling. Indeed, the HIA says it will not bottom until 2019. If Chinese capital inflows fall as much as expected, the price crunch could be severe.

Negative equity anyone?

That leads Credit Suisse to suggest that with little other than housing investment to fuel growth, we can expect to see the RBA having to cut rates to stimulate demand and replace the Chinese capital. Right now, they are more or less alone on the rate cut argument, but who really knows in these increasingly uncertain and febrile economic times?