RBA wary of Chinese downturn's effect on Australian housing market

by John Maguire18 Apr 2016
The Reserve Bank’s latest commentary on financial risk has been dominated by the apartment construction boom in Australia, along with concerns over the health of the Chinese economy.

The RBA warns that the prevalence of Chinese buyers in Sydney and Melbourne could increase the volatility of the property market in Australia, pointing to Foreign Investment Review Board figures showing that overseas buyers could account for up to a fifth of all purchases in recent residential real estate.

With China having such a strong stake in Australian real estate, the RBA is therefore cautioning that a slowdown in Chinese economic fortunes could mean fewer buyers for Australian property, or indeed a deluge of sales as international investors move to repatriate their investments. Australia’s biggest cities are most vulnerable.

"A substantial reduction in Chinese demand would likely weigh most heavily on the apartment markets of inner-city Melbourne and parts of Sydney, not only because Chinese buyers are particularly prevalent in these segments but also because other factors would reinforce any initial fall in prices," the RBA stated.

"These include the large recent expansion in supply in these areas, as well as the practice of buying off-the-plan, which increases the risk of price declines should a large volume of apartments return to the market if the original purchasers fail to settle."

The impact of a Chinese downturn on mortgage brokers specifically needn’t necessarily be a negative one, however, with such an event likely to produce a range of unexpected scenarios.

Otto Dargan, managing director of Home Loan Experts, told Australian Broker, “A slow down of the Chinese economy could have some surprising effects on Sydney and Melbourne. We could see increased activity due to overseas owners selling property in Sydney as well as a flight of capital from China causing others buyers to consider our market. Fear can drive a market in unusual directions and I don't think we can predict the future so well.”

He added, “If there is a significant fall in demand for new CBD apartments then I expect the government will step in with first home benefits to try to keep the market buoyant. So it may mean that brokers who specialise in foreign investment lose, while brokers that help first home buyers win.”

In its report, the RBA added that it believes China possesses the expertise and financial strength to negotiate any serious slowdown.