Sunday, September 28, 2014

Grey money from China helps blow the Aussie property bubble

Is there a housing bubble in Sydney and Melbourne? Of course there is. The two markets have been distorted for years by an influx of murky money coming from China, which should be of interest to the Foreign Investment Review Board. Except that the board is a bureaucratic joke inside the real estate industry.

It is a joke that has been lost on would-be first home buyers in particular, who have been watching properties slide out of reach or requiring a level of debt that their parents and grandparents never had to carry.

It is no coincidence that during the past seven years the price of housing has increased by 40 per cent, shrugging off the Global Financial Crisis, while not a single foreign home-buyer has been prosecuted by the FIRB, even though thousands of established homes, valued at tens of billions of dollars, have been purchased illegally.

There is nothing wrong with a boom market or a globalised property market or closer ties to China, our biggest trading partner, where most of the buying comes from. But a bubble market is different.


Over the past 20 years home prices in Australia have almost trebled while average household income has not kept up. The difference has been made up with debt. The ratio of household debt to household income is now 150 per cent - a historic high.

The combination of the Chinese economic revolution, which fed an Australian commodities boom, a gangbuster immigration program, which added a net one million people over three years at its peak, and a tax regime which encourages individual superannuation investors to buy investment properties has produced a long-running property bull market driven by demand.

All straightforward. Not a speculative bubble. But what is happening now is not straightforward. The 40 per cent increase in Australian home prices since January 2007 contrasts with a 12 per cent decline in the United States and almost zero growth in the United Kingdom over the same period.

Obviously, Australia has a more stable banking system, with more sturdy governance and little exposure to toxic real estate debt, plus the protection of the commodities boom driven by China.

But Australia is a smaller market, more susceptible to impact from the weight of Chinese investment. And commodities companies are now in a bear market, commodities prices have been declining for months, and the historic golden phase of the resources investment boom is over. Yet the property boom rolls on.

Even the governor of the Reserve Bank, Glenn Stevens, has expressed concerns. The bank's latest Financial Stability Review, issued last week, is full of discussion of "speculative demand", "unbalanced" markets and first-home buyers being "priced out of the market by investors".   

The Reserve Bank might want to consider not taking up the heavy mallet of macro-economic policy, including higher interest rates and lending restrictions, but instead agitating for the FIRB to finally sending a signal to the market by prosecuting some people.

Here it is handy to know immigration lawyers whose practices are based in China and Hong Kong because they rely on the FIRB being useless when it comes to dubious foreign investments in housing. The federal government knows it has a problem. It set up a parliamentary committee of inquiry into housing affordability, headed by Liberal MP Kelly O'Dwyer (who replaced her mentor the former Treasurer Peter Costello in Parliament). She has not even waited for the committee to issue its report to put the FIRB on notice. "There has been a failure of leadership at the FIRB," she said on September 16.

An inert FIRB appears powerless to inhibit the entire grey economy that exists to get money out of China and into safe overseas havens, of which Sydney and Melbourne property are among the most popular. The Chinese government imposes a limit of US$50,000 ($57,000) a year that can be sent out of the country. Cashed-up Chinese bypass this via an informal banking system similar to what has been operating for centuries among overseas Chinese. Money is shifted through personal relationships rather than transparent bank transfers.

Also, the Significant Investor Visa set up by the government is dominated by mainland Chinese who can meet the requirement to invest $5 million in approved investments within four years. That becomes a qualification for a permanent visa. Those visas are prized as an express lane to dual nationality, where an Australian passport becomes an insurance policy not a new life.

Lower down the chain, another self-contained industry has taken root for Chinese investors wanting to buy apartments in Sydney and Melbourne. Entire high-rise buildings are financed, built and sold for the Chinese market, with non-Chinese buyers rendered irrelevant. Small one-bedroom apartments are the norm. All this is legal.

Combined, the legal and grey investment from China create a demand that would otherwise not exist, producing investment for Australia. It also has a knock-on effect to the housing market. This, coupled with local superannuation investors, has created valuations that are detached from average weekly earnings and the demand from would-be owner-occupiers.

Over time, the impact of the Chinese money flow on the Sydney and Melbourne housing markets, both legal and grey, is measured in tens of billions of dollars. So, too, is the impact of the new class of superannuation investors.

It points to the main solutions to the housing affordability dilemma - avoiding Generation Rent - being political, not economic.

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