Which part of the property market will grow 15% in 2016?

I’m sharing here with you a forecast for Chinese buying that my Juwai.com co-founder Simon Henry recently discussed with the Australian Financial Review, as well as some additional facts.

Statistical forecasting involves seeking patterns in the data you have that are likely to continue into the future. This sounds simple, but it’s not. All good forecasters know how vulnerable they are to events.

So before I get to my forecasting, let me just say that we have looked carefully at the evidence, and what you read here is the result of our best logical thought. Perhaps we are being too conservative or possibly too optimistic. I think it’s often safer to take the middle path between those two extremes.

With that said, here’s our forecast. At Juwai.com, we see Chinese buying growing by five per cent to 15 per cent in 2016.

Beyond this year, we see many reasons to conclude that Chinese investment into Australian residential and commercial property will increase and even set new records by 2020.

Our 2020 forecast for all Chinese international real estate investment is $220 billion, which would be up more than four-fold from $52 billion in 2014.

One big contributor to increased purchasing in 2015 and beyond is the Chinese government’s stated policy of making the yuan a global currency. This is a necessary step to making China itself into an Asian financial hub along the lines of Hong Kong and Singapore, if not larger and more important. As Bloomberg puts it, "removing capital controls is necessary to achieve that".

Most Australians know that China limits the amount of money that its citizens can move overseas to about US$50,000 per year. This limit has kept many Chinese who have the wealth and predisposition to invest in Australian real estate from actually doing so.

Credit Suisse reported in December that their extensive consultations with Chinese officials and businesspeople led them to believe China will make “significant” progress in dismantling these capital controls by the end of 2017. 

Bloomberg reports that China’s government could even formalise the goal of removing capital controls by 2020 in its 13th Five-Year Plan, which will be released in March.

Besides the strong internal desire to carry out this vital reform, China also faces outside pressure to speed things up. Now that the IMF has added the Chinese yuan to the reserve currency basket, international institutions are expecting China to further liberalise its financial system. 

This will be no small change. China is like a fish tank full of water. When you remove the glass walls, some of the water will flow out. When the world’s second-largest economy drops the wall that has been keeping its more than $10 trillion of wealth locked up inside its national borders, the resulting flows of money into countries like Australia could be exceedingly large.

The Bank of England concluded that even small changes in China’s openness would have a global impact, because of the size of China’s economy. Juwai.com’s estimate is that a complete removal would deliver an extra estimated $75.7 billion to Australia’s residential real estate markets. 

Our figure depends on a reasonable estimate that wealthy Chinese individuals allocate approximately 10 per cent of their total assets to international real estate. It also assumes Australia will receive the same share of that investment as in recent years.

To recap our forecast, look for solid growth in Chinese investment in Australian real estate in 2015 and look for new annual investment records to be set by 2020.