China correction would have negative effect on Australia property

If China’s currency devalues it could force a widespread selling of property in China and therefore Australia

A China correction could mean widespread selling in Australia.

The action in the long running Australian property boom has shifted to outer suburban land. And at the same time we need to watch closely what is happening in China because there is a potential convergence of events in China and Australia.

This week I was yarning to one of Australia’s top five home builders and he just shook his head as he told me: “Land prices in outer suburbs of Sydney and Melbourne are rising to unsustainable levels”. Because he has large land holdings in both cities he is making a fortune on paper but he knows what is ahead and he spoke with emotion.

But at the moment the market is the market and the old Wall Street adage “follow the money “ applies to outer suburban land. This current property boom started with Melbourne and Sydney apartments but they are declining in price although in Melbourne there is considerable apartment activity in the suburbs outside the inner city and in those suburbs house prices are edging up. In Sydney there has been a small decline.

But back in May in a commentary on apartments I revealed that outer suburban property developers in Melbourne and Sydney were noticing that speculators who were often grabbing multiple blocks in suburban land developments.

At the time it was not major, but suddenly a wave of speculative money decided that outer suburban land in Sydney and Melbourne was a place for action. Those early speculators had got it right because others joined them and pushed the prices higher.

But as the price of the land rises so must house prices and the last hope of first home buyers or people with small apartments who want to have a family home goes down the gurgler.

My home developer friend fears that just as dwelling investors are being squeezed by restrictions on bank finance so the inevitable increase in house prices that will come with increased price of land will reduce the demand for new houses from residential buyers.

While we can look at this speculative run up as just another chapter in a long running boom, the land price boost could be more serious if it substantially reduces building activity in a year or so. Employment in the Australian community is tied to the building industry. We are going to see a big fall in the amount of apartments built in Brisbane, Sydney and Melbourne, partly as a result of a bank squeeze on builders at the instigation of the regulators. At the moment housing development in middle and outer suburbs in Sydney and Melbourne has been strong. Around Australia the great fear has been that the squeeze being applied by the banks on builders and investors will cut back activity and therefore employment. This wave of speculation in outer suburban land adds a new dimension to a danger that covers large areas of our employment.

Just as important is the appetite of the Chinese for Australian residential property. The clamps placed on Chinese investment abroad and the local restrictions on lending to Chinese plus the extra taxes imposed have slashed their investment.

But in parts of China itself housing market shows all the signs of being a bubble of much greater magnitude than anything likely in Australia.

Last night across my desk in the Zerohedge communication came a warning from Anne Stevenson-Yang, co-founder of research firm J Capital, that speculation in the Chinese real estate market is now getting really excessive.

She expects that China’s currency could devalue which is why the Chinese government is cracking down on Chinese companies and individuals that have been on an overseas buying spree. Stevenson-Yang says that everyone in China — from the government at every level to the people who work in banks, construction companies and real estate ----is maniacally focused on their property investments.

And the rise in house prices is what is driving growth in China. For the average middle-class or upper class person in China the focus is on how much will property prices increase this year. They are not thinking about questions like: How can I get my salary to go up? Or how can my children get a better education so they can get a better job? They are thinking dwelling prices — a classic sign of a market nearing a correction. That helps explain the almost fanatical buying of Australian real estate. The danger is that a Chinese correction will force widespread selling in China and therefore Australia.