The Reserve Bank of Australia has expressed its concerns that any significant reduction in Chinese demand for local real estate could have an impact on the mortgage books of Australian lenders.
In its latest Financial Stability Review, released Friday, the central bank highlighted that Chinese investment in Australian residential property had increased significantly in recent years.
“The Australian banking system’s direct exposure to Chinese property investors and developers appears to be small,” the RBA said. “However, if Chinese demand were to decline significantly, that could weigh on domestic property prices and so lead to losses on the banks’ broader property-related exposures.”
The Reserve Bank noted that non-resident Chinese buyers own only a small portion of the Australian housing stock, but added that “industry contacts suggest that they account for a significant and increasing share of purchases”.
The latest Foreign Investment Review Board (FIRB) figures, released earlier this month, showed that Chinese investment in Australian real estate doubled to $24 billion in the 2015 financial year.
The RBA’s Financial Stability Review predicted that a substantial reduction in Chinese demand would likely weigh most heavily on the apartment markets of inner-city Melbourne and parts of Sydney, “not only because Chinese buyers are particularly prevalent in these segments but also because other factors would reinforce any initial fall in prices”.
“These include the large recent expansion in supply in these areas as well as the practice of buying off-the-plan, which increases the risk of price declines should a large volume of apartments return to the market if the original purchases fail to settle.”
While Australian banks have little direct exposure to Chinese property investors, the Reserve Bank fears a reduction in demand could trigger broader risks for local lenders.
“Although the direct exposures are small, if a reduction in Chinese demand did weigh on housing prices, this could affect banks’ broader mortgage books to some extent,” the RBA said.
According to the Review, Chinese property demand could fall as a result of a sharp slowdown in China accompanied by depreciation of the renminbi against the Aussie dollar.
The RBA warned that further tightening of capital controls by Chinese authorities and any event that lessens Australia’s appeal or accessibility as a migration destination – including for study purposes – could also trigger a reduction in Chinese demand for local real estate.
[Related: Chinese property investment doubles]