New abodes in New South Wales are a good deal for Chinese buyers, according to Credit Suisse, which claims that the lion’s share of foreign real estate investment in major Australian cities is coming from China.
In a report released on Friday, the investment bank found that, based on state government data for the four quarters ending in September 2016, foreign buyers purchased 25 percent of all new homes in New South Wales — where Sydney is located, and 16 percent of homes in Victoria — which is home to Melbourne. And among those foreign buyers, 80 percent were from China.
From October 2016 to January 2017, Chinese buyers settled 1,211 out of 1,503 deals made by foreign buyers in Australia amounting to a total of A$1.63 billion ($1.24 billion). Annually, China buys around A$4.9 billion ($3.74 billion) in New South Wales and another A$3.1 billion ($2.37 billion) in Victoria.
Buying Australia’s Way out of a Downturn
House prices in Sydney have more than doubled since 2009 and Melbourne prices are up more than 90 percent, according to Credit Suisse’s report, with many analysts pegging the market as having reached a peak.
Credit Suisse analyst Hasan Tevfik and his team agree with this view, but argue in the report that Chinese demand could prevent a sharp drop. “The Chinese buyer will help cushion the coming downturn in housing and she may already be doing so in some parts of Australia,” the bank predicts.
In Australia, foreign home buyers are limited to purchasing only newly-built homes, and with the Chinese predilection for buying off the plan, developers may get advance warning of any downturn in demand.
“It’s no coincidence that the construction boom was simultaneous with the surge in Chinese buying,” says Charles Pittar, CEO of real estate agency Juwai.com. “Chinese are more likely to buy new property in the pre-construction phase, giving developers the commitments they need to start construction and offer the remaining completed units to local buyers.”
Cheap for China
The reason for Chinese interest, according to the report, is that Australian housing is relatively cheap and profitable compared to first tier cities in the Middle Kingdom, pointing out that the price of a two-bedroom apartment in Shanghai is 25 percent more expensive than its counterpart in Sydney. Also, the report claims that rental yield in Sydney (four percent) is significantly more attractive than Shanghai (1.5 percent) or Beijing (1.4 percent).
“The report should put to rest any concern about foreign buying in Australia. It shows robust and growing purchasing despite local taxes and lending restrictions and Chinese capital controls,” Pittar said.
The capital controls in China have made financing difficult for Chinese investors, shutting down deals across the globe, but these measures introduced late last year had limited impact in Australia on the period studied, with foreign buyers still able to maintain investment at levels commensurate with expectations.
And expectations for Chinese purchases in Australia have been high. In an earlier report, Credit Suisse had predicted that Chinese home buyers would acquire A$47.6 billion ($36.3 billion) in Australian homes from 2014 to 2020.
Taxes Having Limited Impact
But China’s would-be capital controllers shouldn’t feel bad about their futility, as the report indicated that Aussie government measures to dampen foreign demand had also had limited impact.
Tevfik and his team found the Australian government’s 2015 decision to impose a one percent tax on foreign buyers, had done little to curb foreign demand. Even more stringent measures at the state level, including a new seven percent rise from Victoria, four percent from New South Wales, and three percent in Queensland have yet to deter China’s hungry home-buyers.