New analysis from Credit Suisse paints an intriguing picture of this ‘disaster trade’.
I’m not sure exactly what I make of this, but I thought it’s worth offering to my savvy and sophisticated readership.
It’s an idea that comes from Credit Suisse. They reckon that the super-sized surge in Sydney prices can’t be explained by local factors alone. They reckon that the Sydney market is, again, being driven by China and Hong Kong, as safe haven flows look for safe harbour in the safe harbour city.
We have just published an article on the drivers of the Sydney housing market recovery. Key points are as follows:
1. Sydney house prices are rising at a 22% quarter-annualized pace – but the speed of the recovery cannot be explained by local demand and supply factors. Our model of house prices… registers an improvement in the housing demand-to-supply balance – but not to levels consistent with an outright shortage in the market, and rising prices.
2. What local factors cannot explain, global factors can. Juwai Chinese buyer enquiries into Australian property predict and explain house price inflation “surprises” relative to our model. In the year-to-September, buyer enquiries rose by 37.3% nation-wide, and by almost 90% in Sydney alone. Also, we note that Hong Kong buying interest has risen by around 50% since civil unrest broke out, with our proprietary capital flows measure registering large outflows from the city.
3. What goes on in Hong Kong does not stay in Hong Kong. Surprisingly, large inflows into Hong Kong have correlated with outsized gains in Sydney house prices in the past. The correlation is completely the opposite of what we would expect. Essentially, history is telling us that when global credit creation has been strong, more money has flowed into emerging market gateways like Hong Kong, with “crowding in” effects. Central bankers have chosen to accommodate capital inflow through deposit and reserve expansion, rather than exchange rate appreciation. And the resulting excess liquidity has helped to fuel local credit and economic growth, as well as asset price inflation. As residents have grown in wealth and income, they have been able to export more capital abroad, supporting foreign property markets, like Sydney.
4. But now, we are seeing a very large structural break in the relationship. Investors are behaving as if something has permanently changed in Hong Kong, and for the worst. China and Hong Kong uncertainty has spiked to historically high levels. Expatriates, and wealthy locals are choosing to head for the exits. Outsized capital outflows are having a large inflationary effect on property markets abroad, even though the global credit and liquidity signals they send would ordinarily be quite deflationary. Sydney house prices are benefiting from one-time Hong Kong flows.
5. Australia has once again been the lucky country, with potentially another leg in the housing recovery. So far, global uncertainty emanating out of China and Hong Kong has spurred on capital flight into property markets like Sydney.
Hmmm. As I said, I’m not entirely sure what to make of this.
I’d have to think that this dynamic is definitely in play. Absolutely Australia will receive safe-have flows out of Hong Kong. Now doubt about that.
The question is whether we’ll see enough to really move the needle. So far, I’m not hearing from my ears on the ground that there’s really been a surge in Chinese or Hong Konger buying.
And remember a few years ago where every other weekend a newspaper was running a story about poor locals being outbid by Chinese people with suitcases stuffed with cash. We’re not seeing any of that yet either.
So, I’m not sure. At any rate, it’s a bullish signal for property. But how much so? That remains an open question.
What do you reckon?