As oil prices suffered more sickening blows this week, and iron ore and coal languish, only one force stands between Australia and a serious recession – Chinese investment in our residential property market.
And in time that investment will move more heavily into other areas, particularly agriculture and tourism.
… in Australia’s two largest cities, Chinese investment has come to dominate the market. In Australia, the construction activity that comes with that Chinese investment could not be coming at a better time, given the mining investment recession…
We may once again be the lucky country.
Let’s assess Gotti’s claim that Chinese investment in real estate would be enough to offset the decline in mining investment.
According to the next chart, which plots the value of mining construction against residential construction, housing remains hopelessly outgunned in its capacity to offset mining investment’s decline. Mining construction is at least 10% larger than housing construction. I say at least, because some mining-related activities – such as railway construction – is not counted in the below chart, which only captures direct expenditures on mines and pipelines.
As shown above, the rate of change for mining investment also makes it impossible for housing construction to “fill the void” as mining investment literally crashes in the period ahead.
Moreover, the housing price and construction boom already appear to be running out of steam, and by our estimates will enter a downturn in 2016 (if not sooner), weighing on both jobs and growth as the mining purge gathers pace.
There is another issue as well. Even if current high rates of construction are maintained for longer, then rents and house values will inevitably come under increasing pressure as the flow of new supply competes with the existing housing stock. This could bring with it an earlier end to the price boom and sow the seeds of a more serious housing/economic downturn.
I personally couldn’t care less if foreign nationals want to build and buy new apartments in Australia, provided they stay away from established dwellings.
These new apartments will at least add to supply, placing downward pressure on prices and rents. They also provide an important growth stimulus to the Australian economy, effectively representing a new form of export industry for Australia. And without this development, the economies of Sydney and Melbourne would currently be much weaker, with flow-on effects for jobs and incomes.
However, what we should not do is kid ourselves that Chinese property investment represents a sustainable source of jobs and growth for the Australian economy. Like all investment/construction booms it will end, leaving a big void.
Rather than seeking a sugar hit from Chinese investment, Australia’s policy makers should be pursuing fundamental micro-economic (structural) reforms to the economy and tax system, along with a real depreciation of the currency, aimed at boosting both productivity and competitiveness.
Moreover, if Australian authorities truly want to engineer a construction uplift, they should tackle the myriad of supply-side constraints that prevent affordable housing from being built, force-up land prices, and kill productivity in the process.
