Alan Wood on China

One of my favourite economics correspondents, alongside Peter Martin, David Uren and Michael Stutchbury (okay, I am trying not to offend anyone here!), has analytically burst the bubble of media hoopla implying that Chinese investors are driving up local house prices. In The Australian today, Alan Wood comments:

[T]here is...an issue that has troubled the Rudd administration throughout its first two years: Chinese investment...

The government's changes to policies governing purchase of residential real estate by foreigners, which it prefers to describe as clearing away red tape, are...becoming an issue in some areas of Australia's capital cities...

[During]...a conversation a week or so [ago]...with an Australian bank manager in Melbourne's prosperous eastern suburbs...the manager wanted to know, had the government relaxed the rules on Chinese purchase of residential real estate? The question was prompted by a growing number of mortgage borrowers, mainly young couples, who complained they were being outbid at house auctions by wealthy Chinese buyers. It is an issue that has had some media coverage and inevitably will get more.

According to the FIRB, residential property approvals for foreign investors were worth $20.4bn in 2007-08, an increase of $6.9bn from the previous year. Unfortunately, the only figure we can get for China is a total figure for real estate investment approvals, which includes commercial real estate.

If we use this figure to calculate China's share of residential real estate investment, it will overstate it, perhaps significantly. Even so, on this basis China's share of residential foreign investment approvals accounts for only 7.3 per cent, much smaller than the US, Britain and the United Arab Emirates.

There is another way to do this calculation, although its presents problems of incompatible data.

If we use the value of total dwelling sales in Australia for 2007-08 from leading housing analyst RP Data-Rismark, which is $221bn, Chinese real estate investment is only 0.8 per cent. If we only use dwelling sales in the capital cities, which totalled $158 bn, Chinese buyers account for 0.9 per cent. And remember this figure is overstated because it includes commercial property.

Chinese investment is hardly something we should get too excited about, although the government is right to ensure investment takes place on a commercial basis and to place limits on investment by state-owned or controlled companies.