In Monday’s article, we were having a look at the impact foreign purchases, particularly from the Chinese, were having on the property market.
As I said then, according to NAB, for the three months to September 30, 16 percent of new property in NSW was bought by foreigners, up from 11 percent in the previous quarter.
In QLD, 20 percent of property was bought by foreign buyers.
It’s clear that foreign buying is having a hand to play in the current resurgence in the Australian property market, and a big part of that story seems to be China.
And how big? Well, about a month ago, property mogul John McGrath set the markets a buzz with some claims in an interview on Bloomberg television:
“As much as 80 per cent of homes in parts of Sydney are being sold to Chinese buyers. The Chinese market is extremely strong, the strongest I’ve seen a new entrant into the market.”
“I haven’t seen a trend like this in 30 years, in terms of a brand new demographic group entering the Australian market with so much impact as I’ve seen in the last 12 months.”
McGrath then reported that at a recent property auction in Eastwood, all 38 of the registered bidders were Asian. The three-bedroom house with a double lock-up garage and two sun rooms opening on to the back yard, sold for $2.39 million, more than $1 million over the reserve price, after 62 bids by eight hopeful buyers.
It’s not the same as hard data, but McGrath’s been in the game a long time. It’s worth taking his views seriously.
And I read the other day that Chinese buyers now make up one-quarter of all sales made by LJ Hooker Surfers Paradise's project marketing division. On the Gold Coast they’re saying that the Chinese are picking up where the Japanese left off.
So what do we make of the surge in Chinese investment? (And I’m looking at this purely from a property market perspective here.) Obviously if there’s a sustained increase in demand, that will give property prices a lift. And it seems that this is still just the thin end of the wedge. China’s wealth is growing rapidly.
So it seems like it’s a long term plus for property prices.
But could it be a problem? Well, maybe. When you cast around, there seem to be two reasons why the surge in Chinese buying concerns people. I’ve simplified to these two propositions:
- China will buy it all – this is the idea that China will buy up all the real estate and leave nothing for us. A similar variant is that the surge in Chinese demand will jack up prices and our children won’t be able to afford a place to live.
- China will blow it all up – this is the idea that the Chinese surge will create a property bubble that will blow up in our faces when the Chinese disappear.
You can probably tell I’m not too concerned about either of these scenarios. Not that I think they can’t happen, but at this stage, I just don’t think they will.
And it’s not to say that these points aren’t reasonable concerns. History has shown us that foreign buying can create dangerous bubbles. If we want an example of how a surge in overseas buying can spin a market this way, we can look no further than the Japanese experience in Hawaii.
The Japanese became fanatical buyers of Hawaiian real estate in the 70s and 80s. It’s not hard to imagine why – an island paradise that is also one of the states of the world’s biggest economy and dominant superpower.
And so they came in droves, and bought up big. By 1987, Japanese buying had doubled Hawaiian prices, but it didn’t phase the Japanese – they just kept coming.
Of course you’ve got to remember that Japan was in the middle of one of the biggest property bubbles in history at this time. The 737 square metres of the Japanese Imperial Palace grounds were famously valued by some at more than the value of all the real estate in all of California!
In this context, $1.2m for a slice of heaven in the well-to-do suburb of Kahala must have seemed like a bargain.
And you’d have to feel for the Hawaiians. Suddenly having to compete with all that Japanese money to buy a house. It would have jumped out of reach for many….
But then the bubble popped in 1990, Japanese investors disappeared, and by 1995, prices had fallen 38 percent!
Swings in asset prices like this have real affects on the economy. Imagine if you were a business who had taken out a mortgage on a shop-front at the old prices. Imagine if you were a household making buying plans based on the old estimate of your wealth.
It causes quite a bit of havoc in the economy.
(And of course, we saw similar, if less intense versions of this story play out here, on the Gold Coast and in Far North Queensland.)
All told, the Japanese money hit Hawaii like a tsunami. In suddenly, and out even more quickly. All up, the Japanese boom lasted little more than a decade.
So is that what we’ve got to look forward to? Is Chinese money going to swamp us and leave us high and dry?
I’d argue that it’s not. There’s some key differences between the Japanese and Chinese booms here in Australia.
A lot of it has to do with the kinds of properties that the Chinese are buying. The Japanese were famous for golf-courses and over-the-top hotels. Sure there’s a lot of stories about Chinese buying at the top end of town, but the Chinese are also active in the sub-300K market.
And the Chinese aren’t in the business of exporting a bubble, the way the Japanese did. If anything, money and credit is getting tighter, not looser in China.
And to top it all off, China is at a very different stage of development.
But I’ve run out of time… I’ll flesh these points out more in my next post.