Australia’s housing market is headed for a correction. Housing investors have heard this so many times over the decades that they have become immune to hearing it.
The market is overheated, but the question is where will a correction come from?
The answer is China.
In 2013 China was the largest source of foreign demand for Australian real estate with $5.9billion invested. We can expect 2014’s figures to be greater with the Foreign Investment Review Board approving $17billion of applications to buy Australian real estate in 2013.
However, the China ‘river of gold’ is about to dry up. The reason is China’s crackdown on corruption.
Last week the Chinese Communist Party announced the arrest of Zhou Yongkang, who was once the third most powerful man in China. The arrest of Zhou Yongkang does have something to do with local politics, as Zhou was a patron of disgraced Bo Xilai. But there is a larger story here.
Since the rise of China’s President Xi, there has been a high profile focus on corruption. In July, China’s press agency Xinhua announced Operation Fox Hunt to “block the last route of retreat” for corrupt officials. The Chinese Government recently sent 20 teams across Asia, including Australia, to investigate officials who had left the country. The Government made 180 arrests as a result.
China is believed to have found more than 13,000 officials guilty of corruption in the first nine months of 2014.
Corruption in China has been endemic across the dynasties. In recent years, China’s problem has been the rise of ‘princelings’ – the sons and daughters of Chinese officials who were living lavish lifestyles. The anger at princelings has surfaced on a number of occasions and has surprised China’s communist hierarchy.
China’s censoring of the internet is well known. Even so, there has been a massive rise of social media. The conclusion of China experts is that whilst there is a political element behind the corruption crackdown, there is also a realisation in the upper echelons of the Communist Party that they are unable to stop chatter about the corruption of local officials. The fear is that anger at this corruption has the capacity to create the kinds of responses that were seen in the Spring Revolution in North Africa.
In short, China’s Communist Party has come to the realisation that its hold on power will be determined by the way they handle corruption.
For Australian real estate what this means is that the driver of investment from China has changed. In the last five years there has been strong appetite to invest as a way of Chinese investors securing capital.
But transferring capital to Australia now raises new questions. In the current climate Chinese investors are unlikely to want to draw attention to themselves by transferring large amounts of capital internationally. This is not to say that the capital is illegal, it is simply human nature to want to lay low when there is such intense political scrutiny of transfers.
The transfer of capital to Australia will not stop. But it will significantly slow down. When it does will be hard to judge and will be determined by how much is already in the pipeline.
But over the next 18 months we can expect a significant slowing of Chinese capital investing in Australian real estate.
This may well be the trigger that will lead to an assessment of housing value, and a correction in the market.