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Is China's love affair with Aus property over?

Property Observer

Just one month ago, the investment bank Credit Suisse, advised the Sydney housing market looked set to be stronger for longer, as Chinese buyer demand defied a clampdown on capital outflows.

“There is little evidence that new capital controls by the Chinese authorities, announced in December 2016, have slowed demand for Aussie housing,” its analysts wrote.

“We think the tailwind of Chinese wealth creation will mean more, not less, foreign buying of Aussie housing.”

Now the investment bank advises they have detected a sudden withdrawal of Chinese investors from the Australian property market.

They forecast Sydney price growth to stall given Chinese buyers appear to have gone cold.

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I guess we are all intriguingly learning how the Chinese phenomenon plays out – not just the analysts contradicting each other from the same investment bank.

The latest research by Credit Suisse’s economics and equity teams spotted a tight correlation between Chinese capital flows and Sydney housing prices.

Movements typically impacted on local property demand around 12 months on from events occurring in China.

Credit Suisse advised over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls in China.

“This fall foreshadows weakness in NSW housing demand in the year ahead,” they suggested adding the Sydney housing market had already cooled over the past few months.

It noted revised auction clearance rates — accounting for the many late reported results — had now dipped below 60 per cent in Sydney.

“This is a significant development because recent RBA analysis suggests that a 60 per cent clearance rate is typically the break-even point for house price inflation,” Credit Suisse noted.

“House prices tend to fall when the clearance rate is below 60 per cent.”

Credit Suisse suggested Chinese buyers have previously driven up valuations in expensive Sydney suburbs and apartment blocks with this then having a spill-over effect for higher pricing in other suburbs and segments of the market.

“We believe that Chinese buyers spark the cycle, while local investors chase the momentum,” Credit Suisse said.

Credit Suisse even suggested the Reserve Bank of Australia might be forced to cut rates again, as without a healthy housing market, our economy has few other growth drivers to rely on.

It acknowledged the central bank was in a difficult position because of lack of timely, accurate data about Chinese capital flows and their impact.

But recent data on the Brisbane apartment market suggest it is facing an emerging challenge with one in five foreign buyers failing to settle on their off the plan purchases.

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According to rival investment bank UBS, unlike Brisbane, Sydney’s strong residential price growth over the past two to three years ago is ensuring a strong incentive for the foreign buyer to settle.

UBS say they will be watching to understand how foreign buyers react in Sydney over the months ahead.

It advised Brisbane resale prices are 10 per cent or more below purchase price and bank valuations are frequently below the off the plan purchase price especially on poor quality projects.

Sydney is not immune from poor quality projects or softening prices.

This story first appeared in the Daily Telegraph.