Chinese buying is changing, but not letting up…
Today’s blog is brought to you by the number 24.
That’s how much the Aussie dollar has depreciated against the Yuan over the past 18 months, in percentage terms.
Why does a 24% fall in the Aussie matter? Let me show you.
Using some round numbers just to make it easier (on my head)…
Let’s imagine you’re a Chinese investor and you bought a Melbourne apartment, off the plan, back in April 2014. Let’s say the apartment cost $444K.
You put down your 10% deposit, leaving the rest til settlement.
Back in April 2014, the exchange rate was 5.86CNY to the dollar. So you’re 44 grand deposit costs you CY$257,840, and you’ve got CY$2,344,000 outstanding.
Now back then a lot of developers were offering extended settlements. Some as long as 18 months!
So you’re in no rush to settle. And you see that the Aussie dollar is falling against the Yuan, which means your liability is falling. And so you let it run, to see how far it goes.
Fast forward 18 months to today and the exchange rate has fallen from 5.86 to 4.47 – a 24% fall.
You can’t delay settlement any longer, so you settle up the remaining $400K. But now that costs you just CY$1,788,000.
And you’ve just found that you’ve saved yourself CY$556,000.
How much is that? Well, a new car costs you about $CY150,000, so it’s about 4 new cars.
Not bad right?
Or put it another way, swing it back into AUD and you’ve got about A$124K.
About three deposits worth…
See where I’m going with this?
Now of course we don’t know where the Chinese are going to put the money they save. But let’s have a look at their options. There’s Chinese real estate, which seems to be one of the strangest bubbles in history with ghost-cities all over the place. Or there’s the Chinese stock market, which is the second strangest bubble in history, now seemingly being propped up by the government itself.
So neither of those seem like great options.
So then there’s off-shore markets. We know Aussie real estate is popular, but what about equities. So far, we haven’t seen a lot of Chinese demand for foreign equities. Chinese households don’t seem to be that sophisticated. (How many Aussies households take an active interest in off-shore markets?) But Chinese households ‘get’ property. And there’s no shortage of agencies helping them into the market.
And for the Chinese, property has a distinct advantage. It is seen, rightly or wrongly, as being a step towards Australian citizenship (especially if you’re putting your child through university.)
It also seems that Chinese investment isn’t so much about “getting into” anything as it is about “getting out of” China. It seems that Chinese money is on the move because they don’t trust where the economy or the Yuan is going in the long-term. Or they don’t trust the government that might just decided to nationalise their wealth. Or they fear that their wealth is going to get caught up in a serious corruption crackdown that’s been in effect since 2012.
Whatever the case, if it’s a “getting out of” story, then you don’t really care what the price is. You’ve got a set amount you need to get out of the country. If the price falls, you just buy more.
You hearing me? You just buy more.
And so that’s why I think we just haven’t heard the end of the Chinese story, or the influence it’s had on the Australian market.
That said, it’s not entirely a one-way street. The 18-month settlement contracts seem to be a thing of the past. I’m now hearing stories of 30-day settlements, as things look a little shakier back home.
The recent government crack-down on illegal foreign purchases of existing property might also put a bit of a brake on things.
There are currently over 500 cases under review, and there’s an amnesty in effect until November.
I suspect that most of these people had no idea they were breaking the law. They were probably just following the advice of their investment advisers. My bet is that they’ll pull themselves into line, but the demand will remain. Perhaps we might see more switching from existing to new property.
And that won’t be a bad thing.
The Chinese government also seems to be cranking up their anti-corruption drive, and that might slow the flow of funds out of China a little.
But I suspect that if you’re high enough up the tree to seriously game the political system in your favour, you’re probably more a trophy-mansion type buyer than a neat-little 3-bedder buyer. So the impact there might be contained to the high-end of town.
Finally, the falling Yuan does mean that some buyers will be sitting on paper loses right now. If you settled back in April 2014, then you’re down 24% on the exchange rate, up 10-20% on capital gains, so probably down about 10% over-all.
I guess some Chinese buyers won’t be loving that.
But I also reckon many of them wouldn’t care. As I said, the point was to get money out, and they’ve done that. And if they’re investing for the long term, and they can be flexible about when (or even if) they need to exit, then they can just wait for a favourable exchange rate and cash out then.
I don’t think it’s going to put too many Chinese buyers off.
So on balance, I think Chinese money is still a strong net-positive for Aussie property, though it will be interesting to watch how political movements here and in China shape the flow and segment-destination of that money.
What do you reckon?
Will the Chinese buyer underpin the Australian property market for a while?
How do you think you can profit from this once-in-a-century Chinese buying trend?