‘Phenomenal’ Chinese investment drives housing boom

House hunters might complain, but the “phenomenal” influx of Chinese money into the local residential property market could be the best thing that has happened to the local economy as it struggles to make its difficult transition from an unprecedented mining boom.

The demand from foreign investors for Australian bricks and mortar is set to intensify for at least three years, driving a boom in apartment construction activity and boosting the bottom lines of listed companies such as Lend Lease, Mirvac and Goodman Group, according to research by CLSA.

And while there have been plenty of warnings about foreign investors pushing property prices beyond the reach of a generation of local prospective homeowners, Chinese investment may be the catalyst for growth in a non-mining corner of the economy – building and construction – that traditionally is a strong generator of employment.

Around 10 million of the wealthiest Chinese families, or around one in seven, are interested in migrating to Australia, according to a survey conducted by the broker. And home ownership in a desirable destination country is “a key reason” for the flood of money coming into the Sydney and Melbourne property markets, conclude the broker’s analysts.

Not all of those 10 million households will have the financial wherewithal to ultimately act on their desire to relocate Down Under, but it is representative of a powerful trend.

China is already the number one source of source of foreign money in the local real estate market, and anecdotal evidence suggests that that position has only strengthened this year. Sydney and Melbourne have overwhelmingly been the destinations of choice.

The rationale for this growing appetite for Aussie bricks and mortar is more than just financial.

Chinese investors are lured by the prospect of one day moving to a country with clean air, a good education system and a strong legal system. Indeed, the only country Australia ranks behind as a desirable destination for Chinese immigrants is Canada, where new restrictions have been put on foreign investment and immigration.

Existing regulation, administered via the Foreign Investment Review Board, restricts non-residents to new properties. There is anecdotal evidence that these rules are circumvented to illegally allow foreign capital into established properties, but the extent of that is hard to estimate, points out CLSA senior analyst Andrew Johnston, although he does concede that “there will be some Australian residents that are homebuyers that get displaced from buying a new property due to price, such that second-hand property become relatively more attractive”.

In putting together their report on the impact of Chinese investment on the local housing market, CLSA analysts spent the past six months meeting more than 50 property industry contacts, both here and in China, in order to fill in the gaps in a high-profile story which has often relied more on anecdotal evidence than hard data.

The conclusion they reach is no less striking: the “phenomenal” Chinese investment in Aussie housing will continue “for at least three years”.

That will drive construction activity as developers rush to fill the gap between supply and demand.

The researchers believe that its unlikely there will be significant changes in local foreign investment rules, despite a current Parliamentary enquiry. Nor do they believe Chinese authorities will place new restrictions on capital moving out of the country. They are similarly sanguine about the prospect of a property price crash in the top Chinese cities, and note that the non-financial motivations for investing in overseas mean “the price of property in their home market may have limited influence on their intentions and ability to invest in Australia”.

In other words, the trend is here to stay. And behind the doom-laden warnings of inflating property prices, an influx of investment that sparks a jobs-heavy housing construction boom may prove to be the tonic for an economy struggling to transition from its mining boom.

Source Credit - The Australian Financial Review

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