Blame China for the Aussie Property Bubble

26.07.2016 • The Economy

From Emerging Trends Trader (Australia)-

‘Mortgage Money Is Dead Money’.

This was the title of Saturday’s Money Morning article, penned by our own Sam Volkering, editor of Revolutionary Tech Investor. You can find Sam’s full article here.

Being a Sydneysider, the article obviously grabbed my attention. The ‘unaffordability’ of Australia’s real estate market is every Australian’s business. In my view, it’s gotten to the point where ever rising property prices pose a detrimental economic problem, a worsening social problem, and a growing political problem for the nation.

According to Sam: ‘Social and cultural pressure dictates that, if you’re over 30 and don’t own a house, you’ve failed in life.

As you know, I am Australian-Chinese. And what Sam said applies a little differently in Chinese culture. Not only do you need a house (an apartment in China’s case), you also need a car. Lacking those, you’d be hard pressed to find a partner. Which also translates to: ‘You’ve failed in life’.

So how do you keep from being a failure? By taking on a mountain of debt, of course!

Over the last few weeks, I’ve been looking at properties in Sydney again. I was initially looking a few months ago, but decided to wait and see how prices moved. It’s been a few months and prices in Sydney have continued to go up, but at a slower pace.

‘The Australian Dream’ — if there is such a thing — is house ownership. An independent piece of land on which a family can live safely and grow. I came to Sydney in 1998 and lived in a house in Sydney’s inner west. The prices there have gone through the roof since the early 2000s. The strength really came on a few years ago, during the time when I travelled back to Beijing to work.

Owning a house is almost beyond reach now for young people who are just starting out in the world. Unless you are willing to travel farther away from the city, ‘The Australian Dream’ is as good as dead. The boom has been in apartments. Any readers from Sydney will know the extent of apartment construction in the city. This also holds true for Melbourne and Brisbane.

I have been looking at places with a Chinese friend of mine. He has two investment properties on the Gold Coast and will be buying in Sydney soon. As we scouted the different suburbs, it suddenly occurred to me just how large a role foreign investment has played in the past 10 years.

And a lot of it can be pinned on China…

That shouldn’t surprise you. After all, China has the growth capacity to create one entire Australian economy every two years. It is totally conceivable for a tiny portion of China’s outflow to easily distort the Australian property market.

I travel between China and Australia a lot. From my observations, my friend is a typical Chinese investor; he manages several properties in both China and Australia. We both grew up in the 1980s when China’s economic miracle first started.

Fast forward 30 years, the China of today is an economic powerhouse the world has come to rely on. And the Chinese have saved while the West borrowed. Their wealth was accumulated in the last 30 years through double-digit income growths, property inflation and a consistently strengthening yuan.

Today, while more wealth is being created in China, some of that wealth is leaving for places like Australia, New Zealand, Canada, Europe and the US. But it is not just the Chinese distorting Aussie property prices. It’s all sorts of foreign investments from Asia, Europe and the Americas. Undeniably, a lot of that money has come out of the emerging world.

The world has changed in a profound way. A tectonic shift in wealth and power has occurred, and it is by no means finished. In my darkest moments, I fear Australia can never be as good as the past again. Tomorrow, the dreams of yesterday will be a distant memory…

As more money (both domestic and foreign) comes into the property market in this country, prices will be even more out of whack, and any potential correction will be that much more painful.

Flipping through the latest property news you’ll find some frightening predictions. Things like a warning from the OECD on a destabilising adjustment period in the Australian property market in the coming years. Or the repeated message on a potential property correction from the Reserve Bank of Australia. And forecasts of severe corrections in Australia’s property market from research institutions such as Capital Economics.

What scares me the most is the level of household debt-to-GDP in Australia. Australia has the highest household debt-to-GDP ratio in the entire world. In addition, it is one of the most unaffordable places to live in the world. Australia also has the most expensive properties on the planet. Yet ironically, a few of Australia’s cities have been consistently ranked as the ‘most liveable cities’ in the world.

As my friend and I scouted out the suburbs, there is an unspoken understanding that if we don’t buy today, it will simply be more expensive tomorrow.

You can’t blame us for thinking that way; after all, that is exactly what happened (and is still happening) in China. And I do believe more money will come out of that part of the world and find its way here, driving up property prices for some time to come…

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