Why China’s property bubble is less of a threat to the Chinese and Australian economy than you might think.
How China’s property market is likely to affect Australia
There has been a lot of commentary lately on the likely effect for Australia of China’s property values falling.
Is China’s property market really in trouble?
The answer is absolutely – there is no doubt, however it’s not consistent. Values are already falling in many areas, although strong growth continues in major cities such as Beijing and Shanghai.
What does this mean for the Chinese banking system and will it impact ours?
Although Chinese banks do have a reasonably large exposure to property in China, which could present downside risk effects to Australia, there are a number of reasons why deterioration in their property values are unlikely to have a direct effect on Australia.
How does it affect Australian property values?
As for the effect on Australian property values, judging by the current activity in our market, it would appear to actually be having a countercyclical effect on demand. Everyone we speak to who plays a part in selling properties to Chinese residents, indicates that they are buying Australian property largely in order to get their money out of China, to invest it in property markets which they consider far safer than back home. This is not only happening here, but also many other countries around the world, most notably USA and UK.
The key factor then, in whether or how much Chinese property values impact Australia, is not specifically related to property, rather it is a factor of the strength and growth of the Chinese economy. If that falters, Australia’s economy will be hurt, which would have far more of an impact on Australia’s economy and – in turn – our property values.
Why China is not as vulnerable to falling local property values
Again I refer back to the exposure Chinese banks have to property there, however there is one very very big fundamental difference between the Chinese economy and that of Australia’s (and almost all of the rest of the world), which provides China with a good level of protection from harsh economic shocks.
Here, we worry about the impact of falling house prices on our economy for good reason – because the two are intrinsically linked. This is for a number of reasons, the two biggest of which are that:
- consumer confidence is directly linked to the value of our homes (we spend less when our homes are going down in value) – which in turn impacts on business confidence
- Australia’s small businesses make up a large proportion of our economy (roughly 70% of our labour force and 55% of economic output), most of which rely heavily on bank funding that is predominantly secured by properties.
China however, whilst now arguably being more capitalist than communist, remains a centrally controlled economy. Their government has the ability to force the economy to grow at the rate it wants – including forcing its banks to do what it wants – far more effectively than any Western government could ever dream of. As an example with property values, since 2013 the government has sought to cool hot markets with policies including property taxes, stricter checks on eligibility to purchase housing, interest rate increases, mortgage finance restrictions, larger deposit requirements and even bans on additional mortgages for some buyers; meanwhile in cooling areas, they have done the opposite. Furthermore their government has the wealth to force change. One would imagine that they cannot possibly do that forever, but they can more than likely do it for long enough for the global economy to have recovered to a healthy level.
So is the Chinese property market a bubble?
Will it impact Australia?
Directly – unlikely.
Indirectly – probably also unlikely.
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