Chinese investment in Australia is only partly about life-style. The economics of investing in Australia is a much bigger motivation, particularly as the Chinese property market looks less and less inspiring.
Why do you think the Chinese love Aussie property so much?
We’ve all heard about what kind of impact Chinese buying is having. The latest I’ve heard is that they could account for one in ten new homes this year.
Ask you’re average Aussie and they’ll say it’s a no brainer. Australia is an awesome country. The weather’s sweet and we’re living the good life. Why wouldn’t you live here?
That might be true, but somehow I doubt it. The top investment destination for the Chinese is America. We’re second, Canada’s third, and the UK’s fourth.
If the leaderboard includes Canada and the UK, you can be sure they’re not investing for the sunshine.
Dig into a bit further and you’ll see that emigration intentions feature prominently in their motivations. A property is seen as a solid stepping stone to one day living here.
Educational opportunities for the kids also rate highly. Australia has some of the best universities in the world. It seems many Chinese are buying properties for their kids to live in while they’re at University.
But again, I don’t think this can be the full story. Owning property isn’t that big a leg-up towards permanent residency. And the kids could always rent.
So eclipsing and encompassing all these factors is the economics of investing in Australia. The Chinese know that property is always a solid investment, and Australia is still one of the best property markets around.
The Chinese have a long connection with property, and many of the wealthier Chinese, who are the ones looking to invest in Australia, have made their fortunes, in part, through property.
But now they’re casting their property net further afield.
And why’s that? Partly it’s just a basic diversification strategy. But the wealthy and switched-on Chinese know that opportunities at home are drying up.
Because the realty is that the Chinese property market is looking pretty grim right now.
On all accounts the market seems to be slowing sharply, and house prices have actually started falling – for the first time in 2 years. More than half of China’s 70 biggest cities had price falls last month.
Housing credit is also slowing and housing sales have fallen 15% over the past year. Unlike Australia, it seems their market is clearly moving into a down-phase.
As a result Goldman Sachs are predicting prices to fall 10-15% in most cities, and Chinese property will remain stuck in the wilderness for at least two years.
And the key factor driving the slowdown seems to be what the Financial Times calls a “chronic oversupply”. In Beijing, inventories of unsold homes have risen from 7 to 12 months supply in the past year.
And it’s worse out in the Tier 2 cities, where the overhang has risen to about 15 months, and worse still in Tier 3 and 4 cities, where it is a massive 24 months.
Because following the GFC, the Chinese loosened the monetary policy tap, cut interest rates, and encouraged a massive ramp up in Construction.
In 2007, China built around 6 million homes. By the end of last year, that had risen to over 10 million – an increase of 66%!
Now we’re often told about China’s rapid urbanisation experiment, with peasants coming off the farms and into the cities, and this is what creates the need for all these new homes.
But the truth of it is that the pace of urbanisation has peaked. And each year, the increase in the urban population gets smaller and smaller. In the 2000s, over 200 million Chinese made the cities their home. In the 2030s, it will be just 50 million. In the 2040s, China’s cities will have stopped growing altogether.
Indeed, according to the UN population projections, China’s population is actually expected to peak sometime around 2030, and start falling pretty rapidly after that.
And so it’s hard to shake the feeling that there’s a massive over-supply of housing, which will keep downward pressure on prices for years to come.
And the scary thing is that several years of falling prices could actually be the best case scenario.
The St. Louis Fed in the US compared the Chinese market right now, with the US market leading up to the bust there in 2007.
It’s a scary comparison.
In the 5 years leading up to 2007 in the US, and in the last 5 years in China, house prices in both markets increased about 50%. But it’s not prices that are the worry.
It’s the construction figures that are truly staggering. Housing under construction increased about 30% in the US, but it’s increased about 130% in China. That’s that massive construction boom we’re talking about.
But all that supply’s not being taken up. Vacant housing increased about 20% in the US. In China, vacant housing has increased close to 250%!
That’s starting to look like a massive over-supply, and it’s an over-supply that depresses prices, or worse still, could potentially trigger a collapse.
And so this is why the smart money in China is starting to cast their eyes further afield. They see the writing on the wall for the Chinese property market. The best-case scenario is that prices will remain sluggish and doughy over the foreseeable future…
… but with every chance it could end up being a whole lot uglier than that!
And so that’s where Australia comes in – a mature property market entering a boom phase, in a sophisticated and stable economy. AND, as I’ve written about many times, the Australian market this is still defined by a chronic undersupply and shortage of housing.
Savvy Chinese investors would be all over this.
Australia is an awesome country to be sure, but it’s not all about lifestyle.
It’s the economics that’s driving investment in Australia. And as China slows, you can bet on a whole lot more interest in Australia.