Property price, yield irrelevant to Asian hot money?

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ScreenHunter_06 May. 06 09.27

By Leith van Onselen

Hot Asian Money or HAM is commonly cited as a factor pushing-up house prices across Australia’s major cities, as well as in international markets like Auckland and Vancouver.

The Weekend AFR ran an interesting article claiming that the Chinese are increasingly purchasing Australian housing not for potential capital growth or yields, but because they view it as a safe haven:

Shanghai real estate agent Ray Zhou just sold 15 Sydney properties in three days and he couldn’t be less excited.

“That’s about average,” he said while packing up his stand at a property expo in China’s commercial capital.

Mr Zhou’s nonchalance after completing $8 million in sales reflects Australia’s new found status as the second most popular destination for Chinese buyers of overseas property…

And for Chinese buyers it’s not only about price.

They are choosing Australia in increasing numbers, but their decision is not driven by rental yields or hopes for future capital gains.

The decision to invest in Australia or any overseas market reflects the ­anxiety of China’s newly rich.

Many want their children to be educated in Australia as they worry about the pressure of China’s school and university systems. They like that Australia is in the same time zone and the clean air. But most of all they want security.

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So, the newest defence of high property prices is that neither price nor yield matters. Why would Asian buyer be any different to locals? Given a government guaranteed deposit can still get you nearly 5%, buying property with no consideration for return doesn’t stack up. That said, other locations popular amongst the Chinese – specifically Vancouver, Hong Kong, and Auckland – also have expensive housing, so perhaps its a moot point.

On the face of it, increasing demand from Asia would generally suggest that foreign investment is working to push-up home prices, making housing less affordable for Australian locals. However, Asian property developers are also taking an increasing interest in Australia, adding to supply and filling the void left by local developers in the wake of the GFC. From Business Spectator:

…the arrival of offshore residential developers is a relatively new phenomenon.

Investment in residential sites has reached an unprecedented level in Australia. Independent property researcher Kevin Stanley says Asian developers have spent more than $1.1 billion on sites in the last three years.

These sites have approvals for 19,000 units – 30 per cent of the 60,000 apartments approved in Australia each year – and 2,000 houses, in 55 separate projects, located in Melbourne, Sydney, Brisbane, Gold Coast and Perth.

Stanley says the collective development cost of these projects is $10 billion…

Veteran agent John Hill, who runs an agency in Sydney’s inner west, reflects the view of the wider industry, saying that these Asian developers are filling a void left by Australian developers.

The medium-density market in Australia collapsed following the global financial crisis, when liquidity dried up and banks brought in stringent lending rules.

Depending on the track record of the developer, Australian banks require up to 60 or 70 per cent of presale before agreeing to finance a residential project.

Sources say Asian developers are not hamstrung by such restrictions. They source their development capital from overseas at lower interest rates.

Often, they model the viability of their projects differently from the Australian developer who works on supply and demand.

Offshore developers, especially those from China, work on the basis of the broader fundamental of the Australian economy. Often, they have patient money.

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Overall, I have no issue with Asian investment into Australian real estate provided the foreign ownership rules are followed and enforced, and such investment is only into new developments, thus encouraging supply and boosting employment and economic activity, rather than bidding-up pre-existing home values.

However, I have little time for bogus arguments about value having no relevance.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.