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Mar 10, 2014

Chinese real estate invasion? Not according to the data, fellas

Complaints about Chinese buyers inflating house prices miss the fact that foreign residential property investment encourages new housing construction.

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It’s rare to see the Left and the Right reaching consensus, but it appears nothing can pull Australians together as much as the threat posed by Chinese property buyers.

Today Paul “Magic Water” Sheehan offered his take on the impact of Chinese buyers on the Sydney residential property market. He warned darkly in today’s Sydney Morning Herald:

“The growth of the Chinese middle class has been so explosive, and on such a scale, that it has the capacity to affect Australia in ways that will need to be controlled if some trends continue to accelerate. Notably home buying.”

Sheehan, it seems, is was most worried about young people:

“First-time buyers, young buyers, are now caught in a pincer movement between superannuation and Chinese investment.”

A pincer movement. Wow. But Sheehan was merely echoing Clive Hamilton, who recently wrote an article for The Guardian originally headlined “Wealthy Chinese buyers are making Sydney’s housing problem worse”. Hamilton’s piece commenced:

“Every weekend in Sydney, young Australian couples are turning up at auctions excited at the prospect of finally owning their own home, only to find that other bidders are wealthy foreign buyers with money to burn.”

“Cash pouring in from China” was responsible, Hamilton claimed — a “flood of unregulated investment”. It touched on the same themes as Sheehan’s piece later would: young people priced out of the market, official indifference, how Hong Kong doesn’t let the same thing happen.

But the headline on Hamilton’s piece was changed to “Foreign demand is making Sydney’s housing problem worse” after an outcry from readers. The Guardian offered an apologia almost as long as the article itself admitting a number of problems with Hamilton’s article, although “the author stands by his opinion”.

Hamilton and Sheehan aren’t the only ones, though. This “flood” of unregulated money from China is becoming a staple of media real estate coverage, especially in Fairfax papers, which have carried articles about the Chinese property “splurge” as real estate prices, especially in Sydney, have soared.

Well, let’s try some facts, courtesy of the Foreign Investment Review Board’s 2012-13 annual report, which has data on who is buying residential property. Total foreign investment in residential property in Australia fell in 2012-13, from $19.7 billion to $17.2 billion. That was because of a fall in “off-the-plan” purchases; purchases of existing dwelling stock increased to $5.4 billion (it had fallen in 2011-12), and purchases of vacant land had more than doubled to $1.4 billion. Victoria and New South Wales dominate as destinations for foreign investment in residential property, garnering around $5.8 billion and $5.5 billion respectively.

But importantly, foreign residential real estate investment skews toward new dwelling construction: in 2012-13, despite the fall-off in off-the-plan purchasing, $8.64 billion in foreign investment was for new dwellings, with a further $2 billion for other development, while investment in existing dwellings was $6.4 billion. The predominance of new dwelling investment in foreign residential investment is dramatically at odds with the rest of the market, where new dwelling investment is a fraction of housing finance.

Where does the investment come from? Residential property investment from China is substantial. Chinese buyers are the biggest foreign real estate investors: in 2012-13 they purchased just under $6 billion in real estate — but that includes commercial real estate, which is twice as large a target for foreign investment as residential real estate. But Canada and the United States aren’t far behind the Chinese; Canadians invested just under $5 billion in Australian real estate, and Americans $4.4 billion. Singapore was next with $2 billion, then Malaysia with $1.6 billion; in between were the British, on $1.7 billion.

So, even arbitrarily and xenophobically combining all Chinese, Singaporean, Hong Kong and Malaysian real estate investment under a “Chinese” stereotype means “China” is only just ahead of North American real estate investment (and again, remember that these figures include commercial real estate). And if you lump in the Brits and the Kiwis, investment from “white” foreigners exceeds that from “Chinese” foreigners.

Read many stories about white people driving up Sydney real estate prices? Of course not. Hard to get a good anecdote about white people showing up to an auction and bidding successfully for a property. “Chinese” buyers, even if their families have lived in Australia for a century, are easier to spot and complain about.

But let’s assume that all “Chinese” property investment — just over $10 billion of it in 2012-13 — was for residential property, which we know isn’t true. How much of an impact does that have? The total value of housing finance commitments (which isn’t all housing purchases anyway) was $264 billion in 2012-13, so our “Chinese” stereotype is investing less than 4%.

And even if you think 4% is too high and is placing too much pressure on prices, ask sellers in Sydney and Melbourne what they think of foreign residential buyers. Chances are they’re perfectly happy to be getting higher prices.

There are legitimate grounds for concern about housing affordability, but they’ve got little to do foreign property buyers, whether Chinese, Canadian or any other ethnicity. They’re related to land supply, planning laws, development approval processes, NIMBYism, the balance between local councils and developers financing the necessary infrastructure for new housing, and tax expenditures that encourage investment in existing housing stock. The best way to improve housing affordability — assuming that’s what you really want to do, given ultimately that will reduce the rise in value of the key asset of most voters — is to create incentives for investment in building new housing stock.

And oddly enough, at the moment it’s foreign investors who are doing that, not the rest of us.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Bernard Keane is Crikey’s political editor. Before that he was Crikey’s Canberra press gallery correspondent, covering politics, national security and economics.

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29 comments

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29 thoughts on “Chinese real estate invasion? Not according to the data, fellas

  1. Hugh (Charlie) McColl

    CML, have you “rocked up” anywhere in the world and tried to buy property? Clearly you have no idea. It’s possible, by one or another creative means (all legal and above board), to ‘own’ property almost anywhere in the world, except maybe North Korea. Maybe not with Australian freehold title, but so what? So many first and second generation Australians have foreign families it’s not surprising that those families want to set up their children and grandchildren in this country. And take note: Australia is unique, completely unique, in its multiculturalism and its property ownership regulations. If you were selling your property in the inner city and a Chinese or any other foreign buyer put up the highest price, would you be saying, “Oh no, I won’t sell to you, I’ll only sell to a proper resident Aussie with proper resident Aussie dollars.” I don’t think so. And if our government said to, say Qantas, well yes you can sell a portion of the airline and those big sheds at the airport, but only to proper resident Aussies with proper resident Aussie dollars, they’d be laughed off the court wouldn’t they? And do you think that when GM (America) set up in Australia they came to some special arrangement over the ‘ownership’ of their industrial sites – an arrangement that was any different from Toyota’s arrangement or Simplot (abattoirs) arrangement? And what about our big subdivision developers? Are you freaking out about who ‘owns’ Stockland or the other big boys in land development? Are you researching their shareholder lists to make sure they are proper resident Aussies? What is this paranoia (verging on xenophobia) about land ownership?

  2. Nathan Lee

    Oh and as for Dogs breakfast talking about the 9% figure, I presume this is original you meant to talk about from a fairfax article:

    “Of the wealthy mainland Chinese surveyed, 9 per cent owned property in Australia; of those surveyed in Hong Kong, 10 per cent; from Singapore, 18 per cent; and Malaysia, 26 per cent.”

    So it was 9% of WEALTHY mainland Chinese – not of the total population (naturally).

    This article: http://www.smh.com.au/business/property/locals-priced-out-by-24b-chinese-property-splurge-20140305-346hd.html

    Has a bunch of stats, but this does seem to support the idea that foreign investment from China is significant and up 42% from the previous year:

    “Using data from the Australian Bureau of Statistics and the Foreign Investment Review Board, Credit Suisse estimates that Chinese buyers account for 18 per cent of new property purchases in Sydney, and 14 per cent of the supply in Melbourne.”

    Although it also concludes:

    “The rise in domestic house prices, while marginally impacted by Chinese investors, is a result of low interest rates, increased affordability and domestic investors, not foreigners, said Deutsche Bank economist Phil O’Donaghue.”

    Negative gearing is no doubt a far more speculation hyping force, but you can’t deny that having a significant chunk of new properties going overseas is a problem.

  3. R. Ambrose Raven

    Obviously this piece was written to minimise the questions being asked about the impact of foreign (in this case, Chinese) buying of residential property. It should be very obvious just how anxious Big Property is to attract foreign money.

    Indeed, it should have been obvious from the time that financial deregulation turned dwellings into a financial instrument that Big Property had a huge incentive to relentlessly drive prices up forever. Once Big Property reached the affordability limits of locals, it was obvious that it would seek to introduce more and more foreign money (as well as seeking government subsidies and policies that increase prices).

    Ask Credit Suisse: “Credit Suisse estimates that Chinese buyers are currently purchasing around 12% of new homes in Australia … concentrated in Australia’s two largest cities, meaning that an estimated 18% of new dwellings in Sydney and 14% in Melbourne are being purchased by Chinese nationals. The level of Chinese buyers in other markets is estimated to be 7% or lower.

    A generation of Australians is being priced out of the property market. Many face a lifetime of renting.”

    That first-home buyer activity is near record lows at 12.7 per cent of total mortgagee approvals tends to contradict any view that low interest rates have made dwellings more affordable. In any case, low interest rates do not make dwellings more affordable; they merely make them easier to buy, which is a very different matter.

    A vacant dwelling tax remains a very good means of ensuring that all this housing is actually used for housing. It is not being used for housing if it is long-term vacant because the buyer was simply looking for a place to park funny money.

  4. Jeremiah Gonk

    I don’t think the data are telling the whole story on this issue.

    There’s anecdotal evidence of proxy buying (e.g. through relatives, solicitors or buying agents). There’s also the permanent residency racket – the stories I’ve heard from friends who’ve gained PR have gobsmacked me. Doing dodgy courses that they didn’t even complete properly to get points for PR…what a joke!

    What we’re seeing at house inspections every Saturday makes me think the above two factors need to be investigated more. Of course, I am unable to be certain of who are the Chinese nationals and who are the Australian citizens with a Chinese background but judging from conversations overheard with RE agents, most seem to be the OS variety. We have been consistently outbid at auctions by people of Chinese appearance and on private treaty sales, we have noticed a trend of houses with high Chinese levels at the inspection going for way, way more than the valuation. We’ve even had a number of real estate agents tell us to not bother looking in certain areas because we can’t compete with the Chinese because ‘they pay in cash’.

    Yes, my evidence is anecdotal, but I don’t have the time/clout to ascertain any other kind of evidence for these claims. But it’s perhaps something worth looking into for those who do have the time/clout.

    What scares me is that we just want to buy a place where we can settle down and happily live out the rest of our days. We don’t want to put our lives on hold waiting for the Chinese bubble to burst or for the baby boomers to get over their negative gearing fetish (yeah, we know that’s a huge contributor too). We just wish someone would do something about it. But anyone with enough political clout to do it is no doubt benefitting from it, so I know it’s unlikely to change.

  5. R. Ambrose Raven

    A tax on vacant dwellings (or properties that once had a dwelling) set at say 25% of the gross rental value would earn revenue, tend to reduce unaffordability, and strongly discourage speculation. Note that the 2006 census found that 10% of all dwellings were unoccupied. Unoccupied dwellings in Victoria increased by 70% between 1981 and 2006.

    Both Hong Kong and India are considering such a tax, for the obvious reasons. A rate of 1.6% as in NSW is far too low to force the productive use of an idle property. A very significant fraction of properties are long-term vacant, just for the capital gain.

    First, as many foreign buyers (Chinese, in this case) are offshoring money as a hedge against Chinese government action against corruption and tax evasion, they are not interested in Return on Investment so of course not only care little for the dwelling’s cost but also are happy to leave them vacant. There are said to be 180 million vacant properties in China, it being regarded as the best form of saving.

    Second, it would make it more expensive to speculate on future rises in land values, and some of those gains would be captured by the government.

    Third, construction companies would not be able to profiteer through land-banking.

    Fourth, the consequently lower land costs (which the ideologues constantly claim to want) would also increase competition by reducing barriers to entry to the construction sector: for example, housing building is dominated by a small number of big players.

    Fifth, local authorities would have a financial incentive to change land from agricultural to residential (and commercial) use as they would profit from the increased value of the land this would cause.

    In truth, of course, Big Property will do everything possible to maximise its exploitation of the far less well-informed far less powerful ordinary people, while making sure to blame the victim for the inevitable social and economic problems.

    Median housing in Australia is not unaffordable only for those despised by the haters, but for the median working household. So a cop married to a nurse themselves can’t afford a median house in any city in Australia. Buying it is not so much the problem; the problem is to afford it once they’ve bought it.

    There is a very important corollary, namely investing the tax money thus raised into good public housing.

  6. WeRallBeingScrewed

    I dont really care who or where the money comes from if it is legitimate money.
    BUT… as a 20year veteran of equity markets – in Asia, UK and here at home, I have been constantly trained, prodded, reminded, harassed, etc by compliance and regulators on my personal legal responsibilities with regards to money laundering. A stockbroker or private wealth manager who invests money for someone must ensure that the funds are not being laundered. The laws are incredibly onerous and designed to make sure that I, as a stockbroker, will not invest funds in the market on behalf of anyone that I have even the slightest doubt about. The law will not just apply to the firm I work for but also to me personally – criminally.
    Why then are these laws not applied to the Real Estate market??? We all know that Real Estate is an investible asset class – so why do our regulators not force real estate agents to take the same duty of care that a similar agent in the equity market has to??
    I’ve asked real estate agents in the Nth East/East of Melbourne what proportion of current buying is funded by money of a “black” nature – and the answer is almost always “>90%”. The fact that they can see it, the regulators are doing nothing about it and the rest of us are watching an economic bubble forming (and expanding) that will eventually burst (and have far greater consequences), is unfathomable and unjust.
    I’ve spent the last 12 months working on a JV with Chinese partners – and I know that the only imperative that wealthy Chinese have at the moment is to get money out of the country before the new leadership cracks down on “corruption”. I saw it many times with my own eyes.
    It is our fault, not theirs, that we have given them a liquid market in which they can invest readily with “no questions asked” – and they are prepared to pay a premium in order to do so.
    We will look back in 20 years and realise that this was one of the great money laundering rackets seen anywhere in the world – conducted at the expense of our own economy – and our regulators and politicians did absolutely nothing to monitor it – let alone regulate it.
    Real Estate agents need to be made responsible for ensuring they know where funds are sourced from – and be subject to the same laws and regulations that are being enforced in other investment markets.

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