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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 comments

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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.

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