Buying frenzy: Hong Kong and mainland Chinese interest in ‘cheap’ Australian property shows no sign of letting up
Tough property measures introduced by the Australian government this month have not deterred buyers from Hong Kong and mainland China from buying real estate in Sydney or Melbourne.
Following new measures announced in the federal budget, effective immediately, foreign owners will be slapped with an additional charge if their property sits empty for six months a year – an amount equivalent to the foreign investment application fee they pay on purchasing the property.
There will also be a 50 per cent cap on foreign ownership of units in new developments, and reforms to reduce the avoidance of capital gains tax in Australia by foreign investors.
According to a recent report from Credit Suisse, despite home prices in Sydney and Melbourne now ranking as the second and sixth most expensive in the Western world, respectively, “it is clear housing demand is outstripping supply, and we find the marginal buyer of Aussie housing continues to be from China”.
After gathering data from state governments, the report’s authors found that foreigners are still buying the equivalent of 25 per cent of new supply in New South Wales, and 16 per cent in Victoria. According to research analyst Hasan Tevfik, the report’s co-author, almost 80 per cent of foreign demand is from mainland China and Hong Kong.
Despite media reports of Chinese investors walking away from contracts, Tevfik maintains that these buyers “continue to settle on their purchases despite the numerous impediments”.
Those include tighter controls on Chinese capital outflows, which David Chin of consultancy Basis Point believes have already put the brakes on Chinese nationals’ property buying spree worldwide. In Australia, he adds, this is compounded by regulators clamping down on mortgage lending to foreigners by banks.
“This Chinese capital shortage comes at a time of heightened political and social commentary about Australia’s housing affordability and whether Sydney, Melbourne and Brisbane prices are peaking,” Chin says.
However, he notes that population growth continues in the capitals, and rental vacancies are hovering around 2 per cent in Sydney and Melbourne despite continued supply of new apartments.
Chin adds that Chinese offshore buyers still view Australian prices as cheap relative to prices in top-tier Chinese cities.
The Credit Suisse report agrees. Tevfik writes that while it is difficult for many Australians to think of property as a cheap asset, “from a Chinese investor’s perspective, there could be plenty of value in Aussie housing”.
The median price for a two-bedroom apartment in Shanghai is around A$900,000 (HK$5.84 million), 25 per cent more than the median apartment price in Sydney, he reasons. “Also, the gross rental yield in Shanghai is a paltry 1.5 per cent – less than half the gross rental yield for the equivalent property in Sydney.
“Yes, our property is expensive when we compare it to our own history, but it is cheap when compared to Chinese property.”
Investorist, a company which connects off-the-plan property developers with agencies and advisers worldwide, had recorded a temporary slowdown in activity in China but, according to founder and CEO Jon Ellis, it’s now back to business as usual.
It began around this time last year, when Chinese investors “felt unwelcome” by the additional fees imposed on their purchases by the eastern Australian state governments, compounded by mortgage lending restrictions. “We saw demand came off upwards of 30 per cent,” Ellis says.
However, since then, lenders other than banks have emerged offering alternative streams of finance, and “demand has come back to the level it was prior to those decisions”, Ellis says.
Each year, Investorist surveys its partner companies overseas to gauge market sentiment for the year ahead. Among Chinese respondents, education remains the primary reason for buying homes in Australia, followed closely by investment purposes. “Seventy per cent of the agents we spoke to believe 2017 will be a bigger year [for Chinese property investment in Australia] than 2016,” Ellis says.
He even sees the latest measures announced in the federal budget as good news for the sector.
“Anyone selling [Australian] property overseas should breathe a sigh of relief,” Ellis says. “[The measures] could have been much harsher.”
He reasons that the 50 per cent cap on foreign ownership in new developments will only affect overseas developers – the lending criteria of Australia’s leading banks to local developers already restricts foreign sales to between 25 and 30 per cent of units per building, Ellis says.
He doesn’t believe that many foreign-owned units are unoccupied. “Investors are chasing a yield of around 5 per cent, factoring in capital growth and rental,” Ellis says. “You don’t achieve that if you leave your apartment vacant.”
Credit Suisse has maintained its outlook following the budget announcement. Tevfik replies: “There were some measures in the budget which will raise the cost of owning a house in Australia for foreign buyers. But we don’t think this will hurt demand.”
Almost 80 per cent of foreign property buyers in Sydney and Melbourne are Chinese, whose demand for housing appears to be inelastic to rising prices, he says.
“Australian housing seems expensive relative to our own history, but Sydney and Melbourne continue to be cheap when compared to tier-one cities in China or other Western cities.
“For these reasons, we think there will remain strong demand for Aussie housing, and elevated prices, for some time to come.”