I will caveat my comments as Wood Property Partners are not economists or financial analysts and there were some great articles over the weekend in the financial press that are definitely worth a read. From my reading here are some interesting points…
- 48% of Chinese listed companies remain suspended so the Gov’t funded rebound last week was much easier.
- China is the world’s largest importer of crude oil, & copper
- Their economy was already slowing before the equities sell off.
- Their stock market is closed to foreign ownership mitigating the direct global effect.
- Their market indices are still up around 80% over the last twelve months
China is a communist regime and doesn’t play by normal market rules. On Wednesday last week it barred shareholders of more than 5% in a company from selling for 6 months. The government also has extremely deep pockets and while it can’t defy the laws of economic gravity it may well succeed in stabilising the market where Western governments have failed.
The impact on Melbourne’s real estate will of course depend on the next few months, but regardless confidence levels have been checked.
The first direct issue is increased settlement risk for “off the plan sales” to Chinese buyers. Will they have the money to settle? Settlements on unconditional contracts will happen any time from now to 2/3 years away, so potential default rate would vary over that time. The counter view is the volatility may harden their resolve to get money out of China.
The second impact would be if Chinese stop buying foreign real estate. This could be driven by declining confidence in their domestic economy and the need to protect capital. Again the counter view of geographic diversification of capital applies.
Thirdly many new real estate developments are being undertaken by major Chinese companies and if they withdraw this would limit new development, and future supply of apartments. Some property pundits who have been opining on the potential oversupply of apartments in Melbourne may curb their view now in the wake of the Chinese turmoil.
Like all good market analysis it’s critical to keep a solid eye on the fundamental issues and don’t be spooked by noise. Chinese buyers and developers remain a minority player in Melbourne’s real estate market and therefore the impact should be tempered. Also remember investment real estate is for long term exposure to a historically proven growth asset.
As we always stress not all markets or geographies will be universally impacted so get good local advice before you act. Also in times of uncertainty there will always be opportunity.