Former US Fed official says Australian house prices face Chinese investor exodus risk
Australia’s economy could be at risk from a housing market downturn if Chinese buyers retreat from residential property in Australia, according to a former US Federal Reserve official.
Dr Nellie Liang, who was in Sydney recently to share her views on financial stability with the Reserve Bank of Australia, said a "trigger" for a real estate price collapse could be a reversal in international capital flows, The Australian Financial Review reported.
Dr Liang, who headed the Fed's division of financial stability, said Australian policymakers were right to be "really concerned" about high house prices and household debt that was elevated by international standards”.
RBA Governor Philip Lowe has voiced his concern about high household debt earlier and also the heated East Coast residential property market.
"The problem with high house prices and high household debt is it leads to unsustainable debt burdens if house prices fall," Dr Liang said in Washington.
"Even without debt, when you have the outsiders buying properties, if the outside money pulls out and prices fall, there's innocent bystanders who took on debt and end up underwater, which could lead to defaults.
"Twenty per cent moves in house prices isn't crazy anymore."
Since last year, Beijing has narrowed the window for capital outflows and it is already having an impact. At the same time, Australian banks have tightened lending criteria to investors due to regulatory requirements.
China's Wanda Group recently decided to sell majority stakes in its Sydney and Gold Coast luxury apartment and hotel projects, valued at a total of $2 billion.
Other Chinse entities and individuals are also facing demands to unwind and halt offshore investments in a bid to stop capital flight and bolster the value of the yuan.
Reflecting this, China's foreign exchange reserves recorded their sixth straight monthly rise, increasing by $US24 billion ($30 billion) to $US3.08 trillion in July, figures published last week showed, the AFR reported.
National Australia Bank says property experts estimate foreign acquirers in the combined established and new property markets represented 17 per cent of all apartment buyers and 11 per cent of house buyers in the June quarter.
Chinese buyers make up the largest percentage of foreign buyers.
Dr Liang was invited to speak at a closed-door Reserve Bank conference in Sydney in March. The 30-year Fed banker retired as the director of the financial stability division last year.
Australia's surging home prices and high household debt – about 190 per cent of disposable income – were key discussion points about financial stability.
She specially pointed to Australia’s exposure to Chinese investors.
“China is such a big economy now, and they have links to other countries, including to Australia and Canada through the housing markets, that people need to be thinking about," said Dr Liang, now a senior fellow at the Brookings Institution and consultant to the International Monetary Fund in Washington.
Sydney and Melbourne home prices are on track for their fifth straight year of double-digit price growth.
Sydney's median dwelling price has surged 12 per cent over the past year to $856,000, according to CoreLogic.
Melbourne’s is rising faster with, the median dwelling price jumping 16 percent to $655,000 over the same period.
Some property and China experts believe official figures underestimate the real extent of foreign money pouring into Australian real estate because Chinese Australians and permanent resident holders act as conduits to buy property for friends and family back home.
The Reserve Bank has kept the cash rate on hold at a record low of 1.5 per cent since August 2016, helping drive up house prices. Even the APRA’s regulatory moves have had only limited effect going by the recent investor lending numbers, despite the March and June rate hikes by most banks.
