Australia’s economic trade position has been a hot topic this month, with the Chinese diplomats calling for ratification of the China-Australia Free Trade Agreement (ChAFTA) and a last minute settlement on the Trans Pacific Partnership (TPP) with Australia and 11 other countries.
Although Australia is yet to ratify ChAFTA, and the TPP is still being negotiated within the governments of respective member countries, they set precedents for stronger economic ties and increased trade flows.
But what effect do the successful negotiations of these agreements have on Australia’s housing market? It is worth noting that the ChAFTA does have provisions for easier asset acquisition. The document states that:
“Australia shall accord to investors of China treatment no less favourable than that it accords… to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory.”
Where investments are:
“every kind of asset that an investor owns or controls, directly or indirectly, which has the characteristics of an investment, such as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.”
Secretariat of the Foreign Investment Review Board confirmed that the agreement does not include residential dwellings, so the regulatory framework around foreign purchases of housing would remain as the status quo.
The current framework for residential real estate is as follows:
- Developers are allowed to develop new dwellings in Australia and sell to domestic or foreign buyers. Foreign developers from countries such as China tend to win development contracts because they have experience with large projects and have, over many years, developed excellent economies of scale for these projects.
- Individual foreign investors and visitors with a temporary residential visa can purchase new dwellings only. New dwellings refer to newly constructed houses or units that have not been lived in yet.
- A foreign investor that has a temporary visa for more than 12 months (an international student for example), can purchase one established or new home with government approval. They have to live in the home while they are in Australia and sell it when they leave the country.
Given that this framework will remain unchanged under new trade agreements, it is worth considering where the agreements may have indirect impact on the housing market.For example, increased interest in Australia’s beef and dairy exports, which are made cheaper through agreements like TPP and ChAFTA, will likely see increased export demand and foreign investment. Increased demand and investment leads to the development and expansion of agricultural sectors, which requires more workers who demand dwellings, thus driving residential development and prices.
These include areas such as Rockhampton, renowned for fine beef exports. This is aided by developing economic trading partners becoming more consumer orientated and demanding fine food exports.
Secondly, increased demand for commercial real estate in certain areas may make residential housing more expensive. Regional towns and cities that will see an influx of demand from the trade agreements can expect dwelling prices to increase as less land is designated to residential dwellings in favour of new offices, warehouses and production plants.
Commercial real estate investment opportunities are likely to become more competitive compared with residential investments once the trade agreements are implemented. Furthermore, commercial real estate presents a more sound investment currently than declining sectors such as mining.
Chinese investment in Australian commercial real estate increased by over 300% between 2012 and 2013, and at 2014 46% of foreign direct investment received by Australia from China was in commercial real estate. However, price increases in real estate may be offset by increased employment and wage growth opportunities. The extent of economic benefit and employment from these emerging trade opportunities is unclear as Australia already has bilateral FTAs with eight of the 11 other nations that signed the TPP.
However, clear winners defined by Australia’s competitive advantage, such as service providers, educational institutions and certain agricultural producers will likely see an increased demand, employment opportunities, and subsequent increased dwelling demand.
Bad News for the Australian Economy?
The Australian economy received three pieces of bad news recently, but this doesn’t mean that the sky is falling in:
- Net foreign debt is now at $967 billion; that’s up 10% from the $871 billion deficit in March.
- A sharp fall in national income has all but obliterated economic growth, delivering headline growth of just 0.2%.
- The Australian dollar fell below US70c.
Judging by the media headlines – this is telling us that we are all doomed and we should sell all of our assets and hide the cash under a mattress. But Australia has a long history of adapting to adversity. Who remembers the Asian crisis in the 1990’s? The dot-com bubble? The Global Financial Crisis?
None of the crises were an economic disaster for Australia, primarily due to a balanced economy, limited debt and a flexible exchange rate.
Certainly, our debt position is not as strong as it used to be, but we still have other weapons in our armoury. However, recent data indicates that these capital inflows are being used to prop up Australia’s day-to-day consumption rather than investing in our economy. Year-on-year capital expenditure is down by 10%.
I would argue that the inherent stabilisers in our economy will see us through – even if not on a stellar trajectory. Australia is not a one-trick-pony. As the resources boom comes off, I would argue that other sectors will beef up, particularly those that will benefit from a weaker Australian dollar:
Against the US dollar, the Australian dollar is still about 18% above the low it set in 1986, when persistent large current account deficits prompted Paul Keating to declare that Australia was in danger of becoming a banana republic. On a trade-weighted basis, it is two thirds higher now than it was then.
It is 5% and 12% higher against the US dollar than it was in 1997 and 1998 respectively during the Asian financial crisis, which is 29% and 24% higher on trade weighted terms.
It is probably true that our current political leaders on both sides lack the courage to face up to the structural challenges our economy faces, but thankfully our economic fundamentals are strong enough to keep going, regardless.
In 2013, a budget standoff between President Obama and Congress led to a prolonged shutdown of the US government – yet most observers see the US economy going from strength-to-strength.
In 2011, Belgium went 589 days without a government yet things kept ticking over such that Greece, Italy, Spain and Portugal are Europe’s economic concerns.
A strong argument can be made that we are living beyond our means, but that does not mean that it can’t be fixed.
How China’s Share Market Could Affect Australian Property
Have you noticed that there’s not too much talk about Greece at the moment. China has captured the headlines.
China’s share market rout has sparked global attention for numerous reasons. In Australia, there is now talk that China’s share market fall, or crash as some describe it, will put the lid on the Sydney and Melbourne property markets.
Will this be the case?
Let’s think about it… But first, here is a little bit of recent history.
Although the top of any bubble is hard to pick, there are often things that generate a few warning signs. That was the case recently in the Chinese equity market.
China’s Shanghai Composite came to life in the second half of 2014 and began to accelerate to the upside in early March 2015. By the beginning of April, there were some warning bells as signs of rampant speculation emerged. Outstanding margin debt on China’s two major bourses rose to excessive levels and mainland investors opened stock trading accounts at the fastest pace ever. These are classic symptoms of speculative behaviour.
Between 8 May and 16 June 2015, the Shanghai Composite Index rallied by 26%, taking the advance from July 2014 to just over 150%. Then it was over. The market declined by 34% into early July.
So where does that leave us?
If the Chinese equity market has indeed registered a major peak, how will that affect Chinese investment in Australian property? As always there are two sides to the discussion.
On the pessimistic side, some argue that the fall in the stock market has had a negative wealth effect on the Chinese wanting to invest in Australian property. They also argue that many investors have already paid a deposit on a property but may find it difficult to settle. This could put downward pressure on property prices.
The other negative argument is that the ‘crash’ may affect the broader Chinese economy, lowering growth and again lowering the wealth of the Chinese investor.
On the other hand, yes, the equity market has fallen dramatically, but in reality it has reverted back to where it was in March. So it is only the investors who came late to the party that will be in the red. There is anecdotal evidence to suggest that the ‘smart’ investors may have sold ahead of the peak, and ahead of the ‘pack’. Now, with the continued fall in the Australian dollar, those who are cashed up are seeking a safe and less volatile haven in Australian property.
As far as the effect on growth rates are concerned, we should keep in mind that share prices on the Chinese stock market do not necessarily reflect the underlying health of the economy. A recent article in The Economist maintains that the tradable value of the Chinese market is about 40% of GDP, whereas in mature economies it is typically more than 100%.
Remember that Chinese growth has slowed over the past couple of years as the share market has rallied. So the correlation is not great.
So who will be right – the pessimists or the optimists?
It’s a fairly evenly balanced argument so it could be either. But even if there is a slowdown in Chinese investment, it could simply stabilise overall demand rather than bring it to a standstill.
And what if the Chinese market comes to life again? That’s a thought for another day.
- National Property Market Overview
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L J Gilland Real Estate is a prestigious boutique agency specializing in Property Investment Management Services and the Sales of Investment Properties with tenants in place. Comprised of a top performing group of handpicked specialists, our Agents proudly serve Property Investors in Queensland.
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