The RBA released the latest edition of the Financial Stability Review. Whilst they highlight the risks in emerging markets and higher bank funding costs, they argue local banks have limited exposure to these issues, households and business are financially sound and banks have tightened lending standards (as shown by lower LVRs and bigger affordability buffers) so predicted losses remain low, whilst profitability is strong. They are not concerned about high household debt ratios. The RBA also highlights the capital improvements which are in train. So overall they argue the financial sector is well positioned (though with a few issues to work though, for example, exposures to New Zealand Dairy and Property, Resource sector, property development, Insurance sector). They also say the tighter access to credit for households could pose near-term challenges in some medium- and high-density construction markets given the large volume of building activity that was started several years ago. They also suggest some foreign banks operating here could be under more pressure.
They examined Chinese buyers in the Australian Property Market.
Chinese investment in Australian residential and commercial property has increased significantly in recent years. This interest in property from Chinese households, institutional investors and developers is not unique to Australia; they are also active in the property markets of other countries, such as the United States, the United Kingdom, Canada and New Zealand.
The Australian banking system’s direct exposure to Chinese property investors and developers appears to be small. However, if Chinese demand were to decline significantly, that could weigh on domestic property prices and so lead to losses on the banks’ broader property-related exposures. Non-resident Chinese buyers own only a small portion of the Australian housing stock, but industry contacts suggest that they account for a significant and increasing share of purchases. These purchases are largely concentrated in off-the-plan apartments (especially in Sydney and Melbourne), in part because all foreign buyers, other than temporary residents, are generally restricted to purchasing newly constructed dwellings. Consistent with observations by industry contacts, the limited and partial data available from the Foreign Investment Review Board (FIRB) suggest that approvals for all non-residents applying to purchase residential property have increased substantially of late. The majority of these approvals are for new dwellings in New South Wales and Victoria. China is the largest source of approved investment in (residential and commercial) real estate and its share of total approvals is growing, but it still only accounts for a small fraction of overall market activity.
Nonetheless, if a significant subset of buyers reduce their demand sharply, this can weigh on housing prices, and Chinese buyers are no exception to this given their growing importance in segments of the Australian market. Such a reduction in housing demand could result from a number of sources, including:
- A sharp economic slowdown in China that lowers Chinese households’ income and wealth. Any accompanying depreciation of the renminbi against the Australian dollar could further reduce their capacity to invest in Australian housing. In the extreme, Chinese investors may need to sell some of their existing holdings of Australian property to cover a deteriorating financial position at home. A macroeconomic downturn in China could also be expected to have knock-on effects on other countries in the region, which could also affect those countries’ residents’ capacity and appetite to invest in Australian property. On the other hand, if economic prospects in China deteriorate this could make investment abroad, including in Australia, more attractive and result in an increase in demand for Australian property.
- A further tightening of capital controls by the Chinese authorities that restricts the ability of Chinese households to invest abroad.
- A domestic policy action or other event that lessens Australia’s appeal or accessibility as a migration destination, including for study purposes. Industry contacts suggest that in addition to wealth diversification, many Chinese purchases are dwellings for possible future migration, housing for children studying in Australia or rental accommodation targeted at foreign students. If so, this demand could be expected to be fairly resilient to shorterterm fluctuations in conditions in China or developments in the domestic property market, but more sensitive to changes in migration or education policy.
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. 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 purchases fail to settle.
The Australian banking system has little direct exposure to Chinese investors. Australian owned banks engage in some lending to foreign households to purchase Australian property, but the amounts are small relative to their mortgage books. Australian-owned banks also have tighter lending standards for non-residents than domestic borrowers, such as lower maximum loan-to-valuation ratios, because it is harder to verify these borrowers’ income and other details, and because the banks have less recourse to these borrowers’ other assets should they default on the mortgage.
Australian branches of Chinese-owned banks appear to be more willing to lend to Chinese investors because they are often in a better position to assess these borrowers’ creditworthiness, particularly where they have an existing relationship. Nonetheless, although the direct exposures are small, if a reduction in Chinese demand did weigh on housing prices this could affect banks’ broader mortgage books to some extent.
