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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.


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.



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

  1. paddy

    Thanks for this Bernard. I’ve been seeing so much hysteria on this issue, I was even beginning to believe it myself.
    Glad to see some actual facts, dispelling that nasty racist undertone so prevalent on the TV news.

  2. JMNO

    Some of it appears to be a planning issue when it comes to new investment. Towers and towers of glass with tiny one bedroom units have been built or have been approved for central Melbourne and foreign investors are targeted as purchasers and reportedly they snap them up. The towers of tacky units seem to justified on the grounds that we need this high density construction to house our fast-increasing population. There doesn’t seem to be much thinking at a planning level as to whether this is the best type of housing to construct. How many people want to live in a tiny one bed unit forever?

  3. Daly

    Thanks for facts, Bernard.

  4. Hugh (Charlie) McColl

    JMNO, hardly anyone lives in the same place forever. Clearly there is a market for one bedroom units in the inner city. If the owner doesn’t live in it, a tenant will. What’s the big deal?

  5. johnb78

    “How many people want to live in a tiny one bed unit forever?”

    Nobody. But a whole bunch want to live in the city in their 20s/early 30s, and are willing to accept a smaller unit in order to do so. Also workers who’ve moved on temporary contracts (from elsewhere in Australia or overseas), the newly divorced, and commuters with family in the outer suburbs and beyond buying a city flat to sleep in on weekdays.

  6. Tom Jones

    While there may be a degree of Xenophobia about Chinese investment in Australia it doesn’t explain all of the antipathy that is found. The billions spent year on year must make it harder for local buyers because it will keep prices higher and therefore less affordable for young people.

    There is also the cultural differences because while we understand New Zealanders (who are just as likely to be Maori as Pakeha) we cannot have the same certainty that it is Chinese individuals buying or whether there are other elements at play because China doesn’t have open policies about information. The article clearly outlines that there is a lot of money flowing into Australian Real Estate.

  7. Scott

    I like this comment in the report

    “The approved investment figures for off-the-plan approvals for developers and annual
    programs overstate the likely extent of actual foreign purchases. The value of
    investment reported against annual program approvals represents the maximum
    amount foreign persons may acquire under the program”

    The developer “off the plan” category is a dodgy measure as the developers themselves submit the application when proposing to market their off-the-plan developments to offshore interests. That is why the average application is worth over $100 million (as it involves groups of apartments, not just a single). No guarantee the offshore investor will buy them either as they have to market locally as well.

    So its a little bit of funny money going on in those three categories. If you remove them and just focus on the categories which have foreign investors wanting direct investment, you have an increase of 20% in volume and 60% in value over the year.

    Still small potatoes in the grand scheme of things, but there is a reason why the story is getting a run in the press. There has been an increase in foreign investment in real estate, and this is correlating with an increase in prices, though i’m sure consistantly low interest rates, and the reluctance to invest in bonds (which are destined to lose their value when interest rates start rising again) are more of a factor in this.

  8. CML

    I don’t care if it’s the Chinese, the North Americans or the Hottentots! NO ONE, who is not an Australian citizen, should be allowed to buy RESIDENTIAL real estate in Australia, for the simple reason that most other countries in the world do not allow non-citizens entry to their markets.
    Bet none of you could rock up in China and buy yourselves a residential property. Why do we have this idiot mentality of selling off everything that moves in Oz (and some things that don’t!!!)??
    The figures you quote Bernard, are just the thin edge of the wedge. Apart from greed, there is NO reason why Australian citizens should have to compete with cashed-up buyers from everywhere else in the world. Perhaps you will be happy when all the young people in this country are completely disenfranchised!!

  9. pierre

    Finally! Some balance in the ‘ethnic thievery’ housing debate! Seems to me, it’s a design to feed the ‘border protection’ theory, which I also see as flawed? x0x

  10. AR

    Anyone recall the dread of the Rising Yen in the 80s when the Japanese were expected to buy the world? Or at least the Gold Coast before the white shoe brigade could even clear the mangroves.

  11. Dogs breakfast

    Are you sure BK? Paul Sheehan today tells me that 9% of mainland Chinese own property in Australia.

    Now I’m a bit cluey with maths, so I reckon 9% of roughly a billion people, I don’t know how many non-mainland chinese there are, works out at about 90 million homes.

    And I suspect that there aren’t 90 million homes in Australia. So according to Paul Sheehan the Chinese own every home in Australia somewhere between 5 and 10 times.

    Now that I have got that off my chest, I suspect your reasoning is wrong BK, and you haven’t taken into account some seriously salient facts, and I’ll get back to you on that when I get a chance.

    At the very least, surely the policy behind allowing non-nationals to buy residences has to be looked at. It is extraordinarily hard to rationalise.

  12. Bill Hilliger

    Surely the policy behind allowing non-nationals to buy residences has to be looked at. I can hear the bleating and pleading from the housing industry rent seekers already.

  13. 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?

  14. Sean Doyle

    As I suspected, although like paddy, I have to admit to nearly being sucked in. I strongly believe that Chinese investors are being used as a convenient scapegoat for the twin purposes of:
    a) allowing the real estate industry to pretend that it cares about housing affordability; and
    b) distracting people from policies such as negative gearing that are a major cause of said unaffordability.

  15. Nathan Lee

    Well, let’s look at the idea of this investment being necessary. Take Barangaroo – a new development that’s already getting built – then when a chunk those new apartments instead of going to local families for homes are snapped up by foreign investors – how is that good? That then means that a large chunk of new housing is locked up by a foreign investor while the growing number of younger families are kept out of the market to permit those foreign investors a chance to rent seek..

    Again, I’m not seeing the advantages for Australia to have foreign investors displacing young families from ownership in favour of rent-seekers. It also places upward pressure on those that do manage to outbid the foreigners – which takes the form of large amounts of debt.

  16. Nathan Lee

    Also not sure why people feel the need to differentiate between Chinese and other investors – lump together ALL foreign investment – and the upward pressure on residential at the expense of the younger families is significant.

  17. 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.

  18. fractious

    Sean Doyle, precisely, though a cynic might add:

    c) and meanwhile Fairfax (and presumably News Corpse) churn out yet more “news” items every month whose real purpose is reinforce the perception (and thus the fact) that property prices are rising. And in the very next property “news” item, how good is this x% rise in prices for property investors and oh look “Domain”…

  19. 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.

  20. 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.

  21. Liamj

    Thanks Bernard for checking the numbers, but you missed some the most significant drivers of housing unaffordability – population growth, immigration & household fragmentation/shrinkage.

    @ patriot – ha ha, thanks for voicing your shadow, some days i thinks you’re a sneaky yank acting on behalf by your plutocratic government.

  22. Ronson Dalby

    I recently went to a house and land release by Landcom (the NSW Government’s property developer)with my son who was trying to get into the property market as a first home buyer. We were in a queue for a long time and as queues go, I ended up talking to most of the people around me. Every single one of them was there to buy an investment property. Surely a government agency such as Landcom should be targeting first home buyers or, at least, people who are going to live in the properties.

    (My son and I were the only non-Asian or Indian people in the queue and the only ones speaking English. I have no idea whether they were residents or not.)

  23. 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.

  24. Buddy

    “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” – Snap!

  25. R. Ambrose Raven

    Anyway, since “we’ve” stopped the boats arriving, why does it matter whether we can afford to pay for a roof over our heads? “Stopping the boats” is what really matters isn’t it?

  26. Brendan Jones

    Seemed a bit unfair to target the Chinese when there are Australian property investors doing the same thing.

    I can feel another 18C coming on.

  27. 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.

  28. Brad

    Can someone provide a figure on vacancy rates and the %age of dwellings that are owner occupied?

    It’s hard to form a view without this information. Given that Australian tax structure encourages rampant real estate inflation it’s hard to see how stimulating new construction solves housing affordability issues – all the new premises need to be as expensive as possible and inflate as rapidly as possible to maximise ROI. Am I missing something here?

    Given $6.4b in existing houses for 2012-3 amounts to taking 12800 dwellings @ $500k off the market. It’s hard for me to accept that this improves housing affordability. OK, maybe they are turned around and rented out at the exorbitant rates typical of Australia now. It’s hard for me to accept that this improves housing affordability.

    Real estate inflation drags the rest of the economy down by capturing ever increasing shares of private investment and making the cost of living unaffordable for the majority of the population.Didn’t Crikey recently run a story about the negative correlation between productivity and the %age of capital sunk into real estate?


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