Why this Chinese pin won’t pop the Aussie property bubble

Monday, 21 August 2017
Melbourne, Australia
By Bernd Struben

  • Up 110.9%…and rising
  • Latest hurdle for growth?
  • Bitcoin to US$25,000?

It seems every week a new pin materialises to menace Australia’s housing bubble.

One week it may be low — or even negative — wage growth. The next it’s the threat of an interest rate rise from the RBA. Then you’re told that the government will revisit its negative gearing policies, chasing investors out of the market.

This week it’s China. The government in Beijing, as you may have heard, has announced new restrictions on Chinese companies investing in overseas property.

I’ll get into a few more details on that below. But the point is that these stories, and many others, may cause some jitters among property investors. And they do tend to sow a few seeds of hope among the rental crowd still saving for their first home.

Yet, when the initial commotion dies down, the story is inevitably the same. The latest threat to the soaring Aussie property market fades quietly into the background. And prices keep heading up.

Of course, this is no news to controversial economist Phillip J Anderson.

Two years ago, at a Port Phillip Publishing editorial roundtable session in Melbourne, Phil told me exactly where he expected the property market to be today. And he was spot on. You can find out how he knew — and how you can make the same forecasts — here.

More after the markets…

Markets

Over the weekend, the Dow Jones Industrial Average lost 76.22 points, or 0.135%.

The S&P 500 lost 4.46 points, or 0.18%.

In Europe, the Euro Stoxx 50 index closed down 15.94 points, or 0.46%. Meanwhile, the FTSE 100 fell 0.86%, and Germany’s DAX index lost 0.31%.

In Asian markets, Japan’s Nikkei 225 index is down 66.20 points, or 0.33%. China’s CSI 300 is up 0.32%.

In Australia, the S&P/ASX 200 is down 31.31 points, or 0.54%.

On the commodities markets, West Texas Intermediate crude oil is US$48.48 per barrel. Brent crude is US$52.66 per barrel.

Gold is trading for US$1,283.02 (AU$1,619.16) per troy ounce. Silver is US$16.94 (AU$21.38) per troy ounce.

One bitcoin is worth US$4,132.28.

The Aussie dollar is worth 79.24 US cents.

Up 110.9%…and rising

Australia’s capital cities were spared much of the devastation witnessed across Western property markets during the global financial crisis. According to data from CoreLogic, capital city dwelling values, on average, fell by only around 6% in 2008.

For better or worse, we were not spared the ensuing upswing.

Since then, combined capital city home values have increased by 69.8%. Not surprisingly, much of this growth has been driven by Sydney and Melbourne. Melbourne’s average home values are up 95.3% since 2009. While Sydney has seen growth of 110.9%.

Now, I don’t have to tell you that doubling property values every eight years is not sustainable. And yet…

CoreLogic’s July 2017 Quarterly Housing & Economic Review reported that:

June 2017 marked the fifth anniversary of the current housing market growth phase. Over the second quarter of 2017, combined capital city dwelling values had increased by 0.8% which was their slowest quarterly growth rate since December 2015. The June quarter has historically shown seasonal weakness, however, despite a slower rate of growth over the quarter, the combined capital cities still recorded value growth of 9.6% over the past 12 months. With values continuing to rise, the total value of residential property nationally was estimated at $7.1 trillion at the end of the quarter.

Sydney and Melbourne were the only capital cities to have recorded double-digit value growth over the past year with values increasing by 12.2% and 13.7% respectively.

That’s right. After more than doubling since 2009, Sydney’s home values leapt another 12.2% over the past year. And despite some headwinds, the growth story looks far from over.

As CoreLogic reported in an update this morning:

This week across the combined capital cities, the preliminary auction clearance rate rose to 71.7 per cent, up from last week when the final clearance rate fell to 67.5 per cent. There were 2,041 capital city auctions this week, virtually unchanged from last week’s 2,040 auctions as well as being higher than the 1,795 auctions held one year ago. Volumes continue to track higher than what was seen over the corresponding July-August period last year.

They also note that clearance rates above 70% have typically gone hand-in-hand with double-digit price growth in the past.

Figures like this tell me that most home buyers at least share Phil Anderson’s confident outlook for Australian real estate.

Not that Phil predicts endless growth. Far from it. He’s mapped out precisely where he expects property markets to top out. For all the details, go here.

Latest hurdle for growth?

As mentioned above, the latest hurdle facing Aussie property comes from China.

From the AFR:

The Chinese government has moved to halt “irrational” overseas investments by restricting purchases of real estate and entertainment assets, a decision which could dent demand for Australian assets.

The move, designed to curb capital outflows and lessen downward pressure on the Chinese currency, also compels mainland companies to align themselves more closely with Beijing’s foreign policy objectives.

The State Council said it would encourage companies to invest in the $1 trillion One Belt One Road infrastructure initiative…

In a separate article, the AFR notes:

In Australia, most Chinese investment has been in residential property. In FY2016, Chinese investors topped the list of foreign investment approvals, pledging to invest $47.3 billion, the latest Foreign Investment Review Board annual report shows. Of the total, $31.9 billion was targeted mostly at residential real estate assets, FIRB said.

There is now a retreat under way. Chinese property buyers are turning away from Australian housing as efforts by regulators in both countries to slow investment begin to bite…

On the surface, these figures sound alarming. Or promising…if you’re cashed up and waiting for the housing market to crash.

But remember, the Australian residential property market alone is now valued at $7.1 trillion. There are a lot of wealthy vested interests working to keep that value rising. Interests that will ensure capital gains tax exemptions, negative gearing and record low interest rates remain in play.

The rate of growth may well slow. As I said, values can’t keep doubling every eight years forever. But we almost certainly won’t see the housing market crash this year…or next.

So, when can you expect the meltdown? Find out here.

Bitcoin to US$25,000?

OK, I’ll admit it. I’ve caught a bit of the crypto bug. Or is that a byte of the crypto bug? I believe it’s largely driven by FOMO (fear of missing out). And miss out I have, as I’ve sat on the sidelines and watched bitcoin go up over 312% since 1 January this year.

Have a look at the graph below. It shows bitcoin’s performance so far in 2017.



chart image

Source: Coindesk
Click to enlarge


At its current price, bitcoin has a market cap of US$67.8 billion. And that looks to be just the beginning.

According to Bloomberg:

Thomas J. Lee, one of the most bearish stock strategists on Wall Street, is feeling a lot more optimistic about the prospects for bitcoin.

The cryptocurrency could reach $6,000 by the middle of 2018, according to a note Friday from Lee, the Fundstrat Global Advisors co-founder and former chief U.S. equity strategist at JPMorgan Chase & Co. He said user accounts are likely to rise 50 percent and usage per account to climb 30 percent.

Every 10% increase in user accounts adds $222 to bitcoin’s value, and each 10% rise in activity per account adds $274, Lee said.

Lee still expects bitcoin to reach about $25,000 by 2022 amid institutional sponsorship, better transaction platforms and increasing public adoption.

Our own crypto experts, Sam Volkering and Ryan Dinse, certainly won’t argue with Lee. Except perhaps to note that he’s likely erring on the conservative side.

Bitcoin is one of the three core cryptocurrencies Sam and Ryan recommended when they launched Sam Volkering’s Secret Crypto Network on 5 July. If you haven’t subscribed to — or at least checked out — Sam’s new introductory service to the world of cryptos, you can do so here.

Dollar for dollar, I believe it’s the most valuable service Port Phillip Publishing has ever launched. And we’ve launched a lot of valuable services!

If you’ve been feeling a bit of crypto FOMO of late, do yourself a favour. Miss out no more.

Cheers,
Bernd