Investor funds under the microscope

With mining tax revenues falling and concerns over the Chinese economy, commentators are increasingly looking at how long real estate can support the national economy.

An interest rate cut in May highlighted ongoing struggles for the broader economy still suffering a post-mining boom hangover. Australia’s trade deficit hit a new record of more than $4.1 billion in April, while government tax receipts plummeted as iron ore prices almost halved last financial year.

Yet together with February’s cut, the Reserve Bank's latest move to stimulate the economy seems only to have had one effect thus far: to reignite impassioned debate about Sydney’s raging property market.

Ray White CEO Dan White recently told Mortgage Business’ sister publication Real Estate Business that the discussion about whether Sydney housing is in a bubble needs a broader perspective.

“I think what the question really [should be] is: ‘is Sydney an international city that will continue to get a premium going forward?’ Is it being rated as an international city and being benchmarked against all great international cities?” he said.

“All trends around the world suggest that big international cities are outperforming second, third or fourth cities in their country by a huge margin. Certainly people from overseas come to Sydney and don't find Australian real estate too expensive.”

The degree to which foreign capital is supporting local property, and by extension the local economy, is now focused on two potential game changers: government crackdowns on property investment, and China’s share market rout in July.

Anecdotal evidence suggests APRA’s intervention in domestic investor lending is already starting to bite. AFG, for instance, reported a drop of more than eight percentage points in the proportion of its loans written to investors in June.

“If this trend continues, it should help allay concerns about overheating in Sydney … as investment levels there come back into line with the sustainable, long-term national average,” AFG managing director Brett McKeon said when announcing the result.

Meanwhile the recent Chinese share market crash doesn’t appear to have rattled economists.

“With the share market fall in China unlikely to have a major impact on Chinese economic growth, it’s hard to see a huge impact on the global or Australian economies,” said Shane Oliver, AMP’s chief economist.

Indirect economic effects, though, may be understated.

CBRE reported more than $US1 billion worth of Chinese investment in local property in the March quarter alone, boosting state government stamp duty revenues, with flow-on effects to the wider retail, construction and trades industries.

The question now is “what will Chinese investors do next?”

Ongoing instability in Chinese share markets could lead investors to pull out of foreign investments – particularly by selling down assets such as Australian property where generous returns can be realised, enabling them to cover local losses.

Such a move, depending on the volume of Chinese-owned real estate holdings hitting the market, could reverse recent price gains, particularly in booming Sydney and Melbourne.

The alternative, much to the chagrin of Australian home buyers, would be yet more Chinese funds finding their way into Australian property, as nervous investors seek out more stable international opportunities, keeping upward pressure on property prices for the foreseeable future.

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Adam Zuchetti

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