Boomerang buyers

Home prices on the rise in Sydney

Panicky headlines that vast areas of Australian farmland were going under the hammer to Chinese buyers turned out to be wide of the mark last year when a government study revealed that just 0.38% of agricultural land was under Chinese ownership.

In residential real estate it’s also been suggested that Chinese investors were a significant factor in runaway prices in Sydney and Melbourne particularly. Ironically, the latest concern is that this interest might now start to waver, triggering a correction in house prices.

This month, the foreign owners of another 15 illegally bought properties were forced to sell up in Australia, taking the number of forced property transactions to 61 since May last year. Chinese nationals topped the list with 25 of the sales. The most expensive forced sale has been a mansion in eastern Sydney that Xu Jiayin, chairman of real estate firm China Evergrande, purchased for A$39 million ($30 million) in 2014.

And the sense that some Chinese have been behaving improperly was strengthened by reports that Australia’s money laundering watchdog investigated more than $1 billion in property transactions from China last year.

Keen to get their money out of their own country, Chinese home hunters have definitely been a feature of Australia’s latest property boom. That’s despite restrictions on offshore buyers, who are only allowed to purchase new-build properties after getting formal approvals, and are mostly restricted from buying existing dwellings.

But it’s not just in Australia that local authorities have become concerned. Vancouver’s city government was so alarmed by the run-up in home values it has imposed taxes on homes that aren’t principal residences and surcharges on deals involving foreign buyers. Residential transactions crashed almost 40% in January from the year before as a result – and average home prices have dropped close to 7%.

The experience raises questions about what might happen if demand from Chinese buyers drops in Australia as well. Concerns among real estate agents that China’s clampdown on capital flight will have a greater impact are growing. (Indeed, foreign property investment by Chinese companies plunged 84% last month as Beijing’s restrictions on capital outflows bit.)

“We now have a situation where global real estate values in many segments of the market partly hang on the underground banking system in China,” was one of the warnings from Robert Gottliebsen, an economics writer at The Australian.

Despite these fears, a working paper from the Australian Treasury last December concluded that “only a small proportion” of the increase in house prices was attributable to foreign demand, and the chances of a slowdown in interest from China seems to pose more of a threat to the margins of the market in Melbourne and Sydney, rather than a seismic risk in general.

Another set of findings from Canberra’s Foreign Investment Review Board last year indicated that the value of approvals for foreign investment in Australian real estate had increased 75% in the previous financial year to A$61 billion, with the Chinese accounting for about two-thirds of applications. But all the same, Chinese investment accounted for a relatively small percentage of the much larger amounts borrowed by owner-occupiers and real estate investors from Australia in the same period.

In a similar way, Charles Pittar, chief executive of Juwai.com, a website for Chinese purchasers of overseas property, tried to add some perspective to the reports about this month’s forced sales by Chinese buyers.

“These new divestments mean that, out of more than 2,000 investigations of potential illegal home-buying since the process started, there have been only 61 forced sales. Just 3% of investigations find wrongdoing that forces divestment,” he told the Australian Financial Review.

Pittar also suggested that foreign investors are behaving better than the locals, citing estimates from a government study that 5% of wealthy Australians have tried to dodge paying their taxes.

“We find the Chinese investors we work with to be eager to follow the rules,” he insisted last week.

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