Are homes in Australia appealing to Asian investors and is there a property bubble in the country?

According to a new research report published on February 21, 2014 by HSBC International Property Investment Research, it was found that Australia remains as one of the most sought-after private property investment markets among affluent Asian investors seeking to tap the vast mining, and economic growth the country has enjoyed in the past. Most Asian investors believe that the Australian real estate markets are one of the best alternatives to take advantage of the then booming economy, and have taken advantage of the relatively low interest rates in seeking out for loan applications, with the intent to make real estate purchases in Australia.

The HSBC property research paper has also noted that smaller markets such as the State of Queensland (Brisbane, Cairns, Great Barrier Reef regions) and Australia Capital Territory (Canberra) were favoured by many affluent Asian property buyers over larger markets such as New South Wales (NSW) (Sydney) and Victoria (Melbourne). The research was being conducted on 7,245 affluent Asian individuals across seven markets (Indonesia, Malaysia, China, Hong Kong, India, Singapore and Taiwan).

The details from the HSBC international property research revealed that Australia is currently the number one destination for offshore property investment among wealthy Indonesians, while Malaysians and Singaporeans ranked Australia second. For the rest of Asia, 9.0 percent of affluent Mainland Chinese, 10.0 percent from Hong Kong, and 18.0 percent from India are currently invested Australian property.

There are several reasons for many affluent Asian property buyers favouring Australia as one of their top overseas property investment regions including the weakening Australian (Aussie) Dollar, favourable foreign property ownership regulations, proximity to schools, and institutions of higher learning, weather, stable political and economic environment, high proportion of Asian immigrants living in these Australian cities, among others. Most of them desire to work, study, or retire in Australia, and real estate purchases are an inevitable process of making the transition towards the Aussie way of living lifestyle.

A table showing the current property ownership among affluent Asian investors is as follows:

Chart illustrating the distribution of Asian buyers in Australian properties - Feb 28 2014

Source: HSBC international property investment research

Based on the chart above, readers might noticed that Malaysians are one of the biggest property investors in Australia (26.0 percent), followed closely by Singapore (19.0 percent), Indonesia (19.0 percent), and India (18.0 percent). These findings represent quite a significant concern over whether the Australian private property sector is entering into a so-called ‘bubble’ territory, which is part of the question as outlined in the title of this article.

In a January 23, 2014 Bloomberg News article, it was reported that Australian home buyers are borrowing at the fastest pace in four years amid record high prices in many cities, straining debt levels which are some of the developed economies’ highest as interest rates are forecasted to rise. The Reserve Bank of Australia (RBA) under Governor Glenn Stevens has maintained its official cash rate at 2.5 percent, but with a revised statement made recently in the minutes of its last policy meeting that the committee felt that the Australian Dollar was approaching to a so-called fair value, which is approximately AUD/USD 0.8500 to 0.9000. However, the committee refrained from making any changes to the current cash rate of 2.5 percent due to the general market uncertainties with the Australian economy forecasted to slow down to approximately 2.8 percent to 3.0 percent in annualised growth, and unemployment rates at a record high of 6.0 percent during the month of January 2014. In addition, with the US Federal Reserve having started its monetary tapering process as of January 2014, and China’s economic growth slowing down, Governor Glenn Stevens and his team are facing challenges in trying to revive the economy, along with the pressing need to stem the continuing rise in private home prices.

According to the Jan 23 Bloomberg News article, average dwelling values in the biggest cities climbed 9.8 percent in 2013 to a record of Australian Dollars (AUD) 614,367, according to RP Data-Rismark home value index. Sydney led the gains, with a 14.5 percent jump in prices last year to AUD 729,999, followed by Perth with an almost 10.0 percent increase to AUD 618,248. The Australian housing market was touted to be the fifth-most overvalued among countries in the Organisation for Economic Cooperation and Development (OECD) relative to rents, according to an International Monetary Fund (IMF) report published in December 2013. The leader is Canada, followed by New Zealand, Norway and Belgium. Prices in Australia’s biggest cities, home to two-thirds of the population, have risen 26.0 percent since the start of 2009, according to the RP Data-Rismark index.

I have recently posed a question on Livewiremarkets.com, an Australian financial markets centric social media website on why hasn’t the Australian government under Prime Minister Tony Abbott able to use fiscal measures, including the imposition of property price cooling measures similar to the ones in Hong Kong and Singapore that will dampen foreign and local property buying demand. The responses given by many Australian investment professionals have generally been similar, highlighting that given that the administration is relatively new, and Prime Minister Abbott and his cabinet are refraining from adopting harsh measures to curb the rise in property prices in order to please the general Australian voting public, it is unlikely that drastic property cooling measures such as the ones seen in China, Hong Kong, and Singapore will be implemented. This also meant that the RBA will carry the burden through the use monetary policy measures, and tightened loan restrictions to curb the risks of property ‘bubbles’ forming in many cities.

The Australian economy is already starting to slow down, with news out on February 27, 2014 that Mr. Alan Joyce, Chief Executive Officer at Qantas Airways announcing massive job cuts, and bonus freezes at the flagship carrier, along with expected automobile manufacturing shutdowns in states such New South Wales (NSW) and Victoria, it is inevitable that these announcements regarding job reductions are expected to put the brakes on the continuing rise in private home prices, and purchases. However, with RBA staying pat on its interest rate guidance, it remains to be seen whether there is an imminent collapse of the Australian housing sector which could spark off volatilities that might sweep across the region and the global financial system The investors might also be doubting the overall economic stability of Australia, and could withdraw their investments from the country, leading to massive capital outflows, and systematic collapses of the financial system. The Australian government and the RBA is expected to closely monitor the housing market situation and will adopt drastic measures if needed, but for now, it remains to be seen whether policy makers are making any preemptive moves to prevent a potential housing market collapse in Australia.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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