Last week I clued you into a little puzzle in the housing market.
It comes from John Fitzgerald. A man who manages a mountain of money, and does it very, very well.
What he noticed is that while the property market is booming, we haven’t seen the kind of pick-up in credit that we’d normally expect to see.
Most buyers purchase property with finance, so if there’s a lot of extra buying going on, which there seems to be, you’d expect the finance data to be booming too…
But it isn’t.
It’s an enigma wrapped in a riddle. How do we explain it? Is there something wrong with the data, something that it’s not picking up? (That can often happen.) Or is there a mysterious ‘dark matter’ energy that driving the market into new territory.
Let’s flesh it out. But first, let’s clarify our terms of reference a bit. First of all, and I’ve made this point a few times, we’re not into boom land just yet. The media is making a lot of fuss about the boom, but let’s not get ahead of ourselves.
This is just the first phase in the cyclical upswing. Prices bottomed about a year or so ago, and we’re still building momentum. The boom is coming, but we’re not there just yet.
(Which is a good thing. Now is the time to buy, before the boom matures. This is when the best capital gains are on offer.)
That said, things are very clearly hotting up. Auction clearance rates in Sydney have been up above 80% for 11 weeks in a row (yep, wow!), and prices are certainly on the move.
But so far, we haven’t seen a huge pick up in the credit data. That’s what this chart here shows. It’s the growth rate (year on year change) in the RBA’s credit aggregates.
The light blue line gives you the total. It’s growing at around 3½ percent. That’s not bad.
(Also check out the green line. That gives you personal credit (cars, sofas etc.) That’s back into positive territory. This is encouraging. It looks like the household deleveraging (penny-pinching) might be coming to a natural conclusion…)
But the key metrics for us are the blue and red lines. That’s housing credit for owner-occupiers and investors. Note that both of these are trending upwards. Investors have been holding the fort for a while now, but the recovery in owner-occupier credit gives you a sense for the broad foundation of the current housing recovery.
However, while housing credit is trending upwards, we’re a long way of the boom time days. In the 2009 mini-boom, housing credit growth was giving 10 percent a nudge, and it was even higher than that prior to the GFC.
So there’s a bit of a puzzle here. Prices and activity are certainly running ahead of credit growth. It’s not a huge gap at this stage, but I think you’d have to be expecting credit to make up some ground over the next year or so.
But how do we square off the circle, my dear Watson?
Well, John reckons there’s two new players in the market.
The other new player is the Chinese.
As he says, “I look at China and you can take my numbers on SMSF and quadruple them and still not come near the capacity there. John McGrath told me that one of his Sydney auctions in September had 16 registered bidders – all Chinese origin and all cash buyers.”
“The top two house sales in Australia this year were for $52m and $33m, both to the Chinese and both in cash.”
There’s not a lot of great data on foreign purchases, but what there is seems to support John’s thesis.
A NAB report seems to suggest that there’s been a surge in foreign buying, particularly in NSW.
According to NAB, for the three months to September 30, 16 percent of new property was bought by foreigners, up from 11 percent in the previous quarter.
That’s a big increase. And while the overall share remains relatively small, a surge like that in just 3 months would be enough to give a sudden spark to the Sydney market.
Just as we’ve seen.
Queensland has the most foreign interest in its property market, with 20 percent of buyers from overseas. Foreign interest in both states is up quite a lot, up from around 8 precent in 2010.
But no one knows for sure. Foreign investors are allowed to buy newly-built real estate, such as off-the-plan apartments, with no restrictions.
No one is collecting data, and it’s up to folk like NAB to make the best guess they can.
But part of the reason for that is that this is still a very new phenomenon. Chinese buyers were practically unheard of prior to the GFC. Now they are clearly a very serious player.
But my feeling is that this is just the thin edge of the wedge. As I said last time, China is creating 25 billionaires a month, all looking for somewhere solid to preserve wealth.
And my feeling is that Chinese buying isn’t so much about buying for capital gain, or rental return. It’s about getting your money out of China, and turning it into a real asset in a mature, politically stable economy.
They’re playing a very long game.
And after the Chinese, who’ll be next? India, Indonesia, Malaysia?
The world is developing quickly. It gave us the mining boom a decade ago. A property boom just might be next.