Property prices in Melbourne and other major Australian cities are booming with Sydney’s median house price having just leapt to $824,000 and Melbourne’s to $697,000. The rises are outstripping many Australians’ ability to buy, but not so for Chinese investors.
Australian interest rates may be at an historical low, fueling the domestic market, but Chinese money is adding a crucial dynamic to the boom. A ‘splurge’ may be the more accurate description of the spike in Chinese investment in the last 12 months. It’s estimated that a fifth of new properties in Sydney were bought by Chinese investors this year.
Real estate agents continually report Chinese buyers paying way over the listed price, to secure the property and speed the process. According to the branch manager of LJ Hooker Glen Waverley in South-east Melbourne, Joseph Ngo: “it’s not unusual to sell homes in sought-after areas for $100,000-$200,000 over the expected sale price”. Within the last few weeks, Ngo sold a $2.3 million house for $500,000 more than the asking price. In Sydney just recently, a typical Australian home buyer inspected a newly listed $1 million dollar property on the first Saturday and when he called to make an offer on Monday morning the property was already sold – for $200,000 more than the asking price, to a Chinese buyer.
Why is the money coming in and where is it going?
China’s new economic boom has unleashed huge buying power for it’s citizens. Property prices have risen there delivering healthy gains for investors. In China, the value of new home sales surged 27% in 2013. National investment in real estate rose nearly 20% in 2013.
So they are having their own boom and the roll on effect means mainland Chinese buyers are now cashed up and looking forward. And outward..
Off-shore residential property investment for Chinese originally targeted Hong Kong but after that was swamped, real estate marketers looked further afield and started promoting ‘new’ markets in earnest.
On Chinese property investment website, Juwai.com, which has 1.5 million monthly users and 2.5 million listed off-shore properties, the US attracts most searches with Australia second. The top 10 international cities currently searched by their web base includes Sydney, Melbourne, Brisbane and Gold Coast.
There are 5 main reasons for the Chinese interest in overseas residential property:
- It has become harder to invest in their heated domestic market and offshore property offers perceptions of better value.
- Getting a prized offshore education for their child (usually the only one) is already perceived as an investment and the housing options and opportunities available while they’re studying become part of the ‘investment’ exercise.
- The lifestyle aspect – it appeals to their ego’s and has prestige.
- Immigration is an option they like to consider for the future, and a property gives the perception of a foot in the door.
- With a current real estate boom peaking in China many are now looking to diversify, as a hedge against a possible downturn.
A current popular retirement model for the burgeoning and cashed up Chinese upper middle-class is to augment the pool of wealth they have created with an off-shore educated child, together with an off-shore property.
Australia has had strong connections with China since the gold rush, Melbourne having the oldest Chinatown in the ‘western’ world.
What are Chinese residential investors targeting in Melbourne?
Melbourne’s schools and tertiary institutions are a major draw card for well-off Chinese.
Interest began with smaller apartments close to universities but has burgeoned to include expensive homes and larger apartments, because these often produce better ROI. According to Simon Henry, CEO of Juwai.com, the average budget for an apartment for a child (student) in Australia is currently between 1 and 1.5 million. Which means they are competing with Australian professionals in this category.
Suburbs with good secondary schools are also highly attractive. All the usual good-investment parameters kick in with attention from Chinese buyers to good transport, security and amenity. Chinese often buy for land value – with houses being demolished and replaced. According to Mr. Henry this market is in it’s early days: “ And the wealth in China is just growing”.
It’s estimated Chinese investors bought $5.3 billion of Australian residential real estate in 2013 (Andrew Taylor, co-founder of Juwai.com). Total foreign investment in Australian residential property was $17bn in 2012-13.
Almost unbelievably, for most mainland Chinese private real estate ownership only became possible a mere 15 years ago. “Property is like gold to them” says Andrew Taylor. Many of the cashed up investors are therefore going through their first property cycles. In this light the seasoned investor may ask this: will rushed decisions, enthusiasm and lack of experience, typical of beginners in this field, impact at some point further down the line?
Chinese developers are here too.
Offshore development capital has been matched by overseas residential buyers, adding more steam to Sydney and Melbourne’s apartment booms.
ICD Property is one of the new wave of Chinese developers with large projects in Melbourne Established just five years ago, ICD now controls 5 development sites in and near Melbourne, from the newly launched 632-apartment project Eq Tower in the CBD to a 115-hectare home, land and commercial ‘precinct’ development in Geelong.
According to ICD Director, Michael Mai: ‘’A lot of Chinese people have made quite a bit of money. Now they want to diversity. It’s just starting – and we believe it’s quite sustainable’’
Are Chinese investors breaking any rules?
Foreign investors can buy newly constructed properties in Australia, but based on current law foreign investors cannot buy established dwellings as investment properties.
However, temporary residents with visas for twelve months of continuous stay can purchase 1 established dwelling to live in while they are in Australia. They must sell that home when they leave Australia but this rule does not appear to be rigorously enforced.
But issues raised at the recent government ‘Inquiry into Foreign Investment in Residential Real Estate’, highlighted concerns that foreign buyers are placing ‘unprecedented’ price pressure on residential property which is pricing out the average Australian buyer and making home ownership for many Australians unaffordable.
The Australian newspaper reported (June 21 2014) that local Buyer’s Agents are claiming off-shore purchasers have added a full 10% to home prices. Australian Buyer’s Agents claim officialdom is lagging in its understanding of the problem. When bidding for homes they are regularly being ‘knocked off’ by overseas buyers and that “money is not an object to them.” And also that international investors are circumventing laws on foreign purchases.
The Australian newspaper (June 11 2014) reported that foreign investors’ lawyers and relatives have been called upon to help overseas investors sidestep the rules when buying established Australian homes, contrary to law. Industry experts have reported to a House of Representatives economic committee that many foreign investors regard the $85,000 fine for a breach as just “another cost in doing business”.
But despite the supposedly strict ruling, many breaches are suspected, with established homes being bought, and developed, without a single prosecution since 2011.
In some quarters there is concern that the high prices being paid by eager Chinese investors will not only inflate property values in our major cities, but also make the local market more vulnerable to the volatility of off-shore economic events. If things go pear-shaped in China it follows there will be a glut of investment properties being unloaded in Melbourne, Sydney and Brisbane.
How is the boom impacting on us?
In a positive light, according to Urban Taskforce Australia, (representing prominent property developers and equity financiers) the current rules are succeeding in stimulating development and construction by steering almost all foreign residential property investment into new homes or vacant land.
