Chinese Buyers Not Going Away Anytime Soon
We are often asked about the impact of foreign buyers, and whether it is distorting the market.
Here’s what we think.
Yes, foreign buyers are distorting some markets.
In fact, we’re now seeing something we’ve never seen before in the Australian residential property market – developers supplying stock with no thought for the local supply-demand equation.
Build it, and they will come
Quite simply, some high-rise residential developments, in areas like Melbourne’s CBD or Docklands, are being built wholly to cater to a foreign investor market, in the full knowledge that they will not interest local buyers.
These developments are being built to appeal to investors – mainly Chinese buyers – whose primary motivation may not be to make a capital gain, or to earn income from a tenant, but may be simply to buy an asset outside China.
For this reason, we would discourage a client from participating in markets such as off-the-plans, house-and-land packages and high-rise apartments, because they may not have the tangible fundamentals that Australian buyers are used to. And price falls in these markets may be the norm, not the exception, because they are over-supplied – and distorted – markets.
From what we see, the preferences of Chinese buyers distort other markets, too.
For example, foreign buyers are restricted to only buying new or off-the-plan properties – unless they intend to develop the site or property within two years. Thus foreign buyers are attracted to areas such as Balwyn and Box Hill – where heritage overlays are very rare – and these loopholes may be exploited.
Chinese investors are buying in Balwyn and Box Hill, where they can commit to development, because they can’t buy in say Hawthorn for heritage reasons. This means that Balywn is now more expensive than other premium suburbs, on a per-metre-of-land basis.
These are just some of the subtle ways in which Chinese buyers might be thinking very differently about a transaction than other potential buyers.
China dominating foreign investment
Investment bank Credit Suisse has just released some enlightening research on foreign activity in the residential property market. It found that one in every four new homes in New South Wales was bought by a non-citizen (Source: NSW Office of State Revenue, Credit Suisse), with 80 per cent of those buyers being from China (defined as being people from mainland China, Hong Kong, Macau and Taiwan).
In Victoria, that figure was 16 per cent. That makes 21 per cent of purchases in the two states, worth a staggering $39 billion over the relevant 12 months. (Source: NSW & Vic State Revenue Office, ABS, Credit Suisse.)
Anecdotally, Chinese buyers have re-emerged as a major buying force in Melbourne’s top end housing market, paying prices that local agents find over-the-odds.
At first glance, there are several facts that would appear to make this Chinese activity counter-intuitive.
To buy existing property in Australia, overseas buyers need to be temporary or permanent residents – or commit to development within two years.
Second, state governments place a high tax impost on these purchases. A foreign buyer of Melbourne property now pays almost 14 per cent in property taxes; in Sydney it is 9 per cent.
Third, the Chinese government has clamped down on money leaving China, as it tries to defend the value of the renminbi versus the US dollar. In November 2016, Beijing imposed restrictions on cross-border capital flows, and an individual quota on foreign exchange movements of $US50,000 a year.
Then, on the final day of 2016, the State Administration of Foreign Exchange (SAFE) announced that all buyers of foreign exchange must now sign a pledge that they would not use their US$50,000 quotas for offshore property investment. People breaching this rule would be added to a government watch list, denied access to foreign currency for three years and subjected to money-laundering investigations.
Fourth, the Australian residential market – particularly at the top end – seems to be very expensive on many measurements.
But these points have to be measured against what drives Chinese buyers.
What drives Chinese buyers
Many Chinese investors want to have assets outside the country, to protect their wealth, diversify their asset base and currency exposure, and limit their risk: they may not wholly trust their government, and fear asset confiscation, or even want a possible international refuge.
There is also a status component to owning foreign property.
Chinese buyers are clearly still able to secure the finance to complete transactions, despite a clampdown on money leaving China. They may have already had cash here in Australia; although local banks do not offer mortgages to buyers from abroad, the buyers may have used a non-bank lender that will do so. And even with tightened capital controls, it’s possible that motivated, well-advised Chinese investors can find ways around them.
Lastly, there is the fact that what is “expensive” is relative.
As Credit Suisse puts it: “It is hard for many Australians to think of property as a cheap asset, but from a Chinese investor’s perspective, there could be plenty of value in Aussie housing. Yes, our property is expensive when we compare it to our own history, but it is cheap when compared to Chinese property.”
It’s the same with the property taxes: Australia is actually less of an impost on this score than competing markets such as Vancouver, Singapore or Hong Kong.
The bottom line here is that if the aim is to get money out of China, that buyer will not be thinking of the property in the same way that an Australian buyer will be.
The local market is fighting back. Losing bidders are asking the selling agent if the purchase is subject to Foreign Investment Review Board (FIRB) approval, and whether the agent is satisfied that the buyer has the correct documentation.
We believe we’ll see more of that.