Sluggish Chinese economy may dampen demand for Australian real estate

Belinda Punshon 18 April 2016

Sluggish Chinese EconomyChinese investors continue to snap up Australian property, but the economic slowdown in China coupled with government measures may sting the local property market.

Both Chinese and Australian government authorities attempt to curb Chinese investment in Australia by cracking down on global money transfers and investigating dodgy deals, but it appears that Chinese buyers aren't fazed.

The tightening of capital controls by Chinese authorities will restrict money transfers out of China, making it difficult for investors to transfer funds between the two nations. In addition, the Chinese government is re-working domestic policy to restrict Australia’s appeal as a migration or study destination.

Last year, the Australian Taxation Office (ATO) issued a crackdown on Chinese property purchases that were made by students with little reported income. The ATO investigated more than 2,000 transactions over a two-year period and took action for over 200 cases.

Despite these measures, Chinese and foreign investors are still keen on Australian property. Whether it’s the relative affordability or lifestyle factors that are the draw cards, Chinese buyers continue to snap up Australian property despite authority crackdowns. In fact, industry experts claim that there has been no slowdown in Chinese money flowing into Australia.

The Foreign Investment Review Board (FIRB) shows that the amount of approved Chinese investments in both residential and commercial property is on an upward trend. This figure was $24.3 billion in 2015, up from $12.4 billion in 2014.

However, in its bi-annual Financial Stability Review the Reserve Bank expressed concern about how the potential slowing of Chinese investment could sting local property prices particularly on the Eastern seaboard.

As foreign investors are only allowed to invest in new housing stock, such as through off-the-plan properties, the Chinese share of new housing is around 30% and even higher in CBD locations. In locations such as Melbourne, Sydney and Brisbane where there is an oversupply of high-rise apartments, a reduction in demand could lead to a sharper fall in property values.

An economic slowdown in China and a depreciation of the renminbi against the AUD could further stall Chinese demand (and affordability) for Australian real estate. The Chinese economy grew at its slowest rate in 25 years in 2015 which fuels fear regarding the impact of slower demand for Australian property at a time where the Reserve Bank is anxious about uncertainty in global markets.

"In the extreme, Chinese investors may need to sell some of their existing holdings of Australian property to cover a deteriorating financial position at home," the RBA said.

Although experts say that it will be more of a price correction rather than a collapse, the Bank will be sure to keep a close eye on the performance of the Chinese economy in the months to come.

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