• Andreas identifies four drivers of Codan's strong performance: Read here.

The China Effect

04112014_Andy_image

The China Effect

This week, the Sydney Morning Herald published an article titled As China’s real estate market cools, the nation’s new property moguls look to Australia. The article describes how Australia is increasingly becoming a focus for Chinese property investors, particularly as Chinese property prices slide backwards. According to Wang Peng, managing director of property developer Hanya Federal, “Many, many people are selling their house in China and buying elsewhere, maybe in Australia, maybe in the United States.” Wang goes on to say that Australia is popular because property prices are perceived as “cheap” compared to what is available in big cities in China.

What is the impact on Australian property prices from this increased appetite from Chinese investors? Probably larger than many may think. The reason is that Australia, while roughly the same size as China from a land area perspective, is much, much smaller than China from an economic perspective. Therefore, relatively small changes in investment allocations from a Chinese perspective potentially have large impacts on small economies, like Australia.

Consider the chart below: China has over 50x the number of people that Australia has; around 6x the GDP; and around 3x the total wealth – as well as the number of individuals that control at least $50m in personal wealth.

 

blog 0411

This suggests that, as capital flight from China accelerates, Australian property prices – particularly higher-end property in Sydney and Melbourne – will likely only increase further.

While there is no doubt Australia’s high-end property is already overvalued, it is nowhere near as overvalued as Chinese property in the major cities. And it only takes a relatively small number of Chinese investors to increase their allocation to Australian property to create a wave of investment that overwhelms the local market.

INVEST WITH MONTGOMERY

Andrew Macken is the Chief Investment Officer of the Montaka funds and the Montgomery Global funds. He established MGIM in 2015 in partnership with Montgomery.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE

NOW FOR JUST $49.95

find out more

SUBSCRIBERS RECEIVE 20% OFF WHEN THEY SIGN UP


3 Comments

  1. Spain had a lot of Germans and English property investment. The Germans and English wanted a nice house on the water in warmer weather and seaside towns provided that for the English and Germans. So there was a lot of foreign investment and a large amount came in quickly in the early 2000’s and late 90’s. Spanish sold up and cashed in when the prices got high. But it all crashed after 2008. But this is different than the Chinese buying property in Australia. Chinese want to buy in Australia because it is less populated and there are nice places near the sea and the weather is quite good and it isn’t too expensive in many areas. But I don’t think we will have a crash like in Spain because of our growing population. A growing population at least puts a floor on property prices.

    • 7 million homes needed to support a near-doubling of the population in the 35 years to 2050. Only building 140,000 dwellings per year at present. That produces a 2 million dwelling shortage. prices should go up, especially if the FTA with China sees investment restrictions further relaxed.

  2. Roger – surely this theory and supporting data is consistently reviewed by the government and the RBA. The brakes will have to be applied sooner rather than later to avoid what could potentially be a train wreck for all involved.

Post your comments