Chinese stock market crash to affect Aussie real estate

The recent stock market crash in China has already seen a loss of approximately $US3.2 trillion, after China’s benchmark Shanghai Composite Index soared 150 per cent over the last 12 months. However, the Shanghai Composite Index is still 72% above where it was 12 months ago and it was only a matter of time until China’s stock market bubble would burst.

This massive bubble was fuelled by margin lending and investors looking for greater returns as the Chinese property market weakened.

This crash is already being described as “China’s 1929”, the year of the biggest stock market crash in history which led to the Great Depression.

With warnings of a further slowdown, all heads turn to the Australian real estate market and how this Chinese stock market crash will impact Australia’s property prices and real estate market.

Currently, China is the single largest foreign investor in Australian real estate, and during 2014-2015, the FIRB approved nearly $12.5 billion worth of Chinese investments. This is forecast to rise over the coming years and Chinese investors are set to pump over $60 billion into Australian real estate by 2020. Most of this investment will be in Sydney, but if property prices start to cool in Sydney, investors will look to Brisbane, where the median house price growth is expected to outpace the national market until 2018.

So how will this stock market crash affect Chinese investors, investing in Australian real estate? There are of course differences in opinion as to what Chinese investors will do, with the main question being should investors hold on to their shares and hope for the market to improve, or should investors shift their investments into other assets, such as real estate?

The negative outlook

With the Chinese stock market taking a turn for the worse, should Australia be worried? We should be prepared for the worst case scenario as Chinese investors who invest in real estate may also play the stock market as well and have made a significant loss. This could cause the following:

1) Stop investing in Australia
As shares have fallen dramatically, this could make Chinese investors hold back on investing in Australia due to having less funds available and being more conscious of their money.

2) Investors unable to settle
There are many Chinese investors who might have already paid their deposit on a property, but have yet to settle and pay their remaining 90%. Developers therefore have the right to be worried if many of their buyers are unable to settle and no longer have the funds to purchase the property.

3) Broader Chinese economy
There is also the worry about how the crash will affect the broader Chinese economy. Because of this, some developers are pushing their projects forward ahead of schedule to get them across the line quickly, before Chinese investments could potentially come to a halt altogether.

The positive outlook

Although the Chinese stock market crash has its negatives and concerns, this crash could also have a positive impact on Australian real estate with investments continuing to flow in.

1) Falling Aussie dollar
The Aussie dollar has been falling in value and is expected to continue to fall with economists predicting a fall to as low as $0.65 by 2017. This is good news for foreign investors as the lower dollar will make Australian property much more affordable and appealing.

2) New investments
With the value of shares in China plummeting, many Chinese investors might now try their hand at investing in other more stable assets such as real estate, with Australia being a key place to invest in right now. Australia could therefore see many more new investors entering its property market.

It’s still early days and hard to tell what the Chinese economy will be doing and how hard this stock market crash will affect Chinese investments and other countries. Australia heavily relies on exporting goods to China, with China accounting for 30% of Australia’s exports which is concerning for the Australian economy.

In spite of this, Australia has a lot of potential for growth unlike the Chinese real estate market and remains an attractive place for Chinese investors to invest in, particularly in property with the Aussie dollar so low at the moment, and expected to drop even further. This stock market crash could therefore work in Australia’s favour in terms of real estate.

The demand for new property in Australia is high compared to China where there is the problem of oversupply. Australia has a huge undersupply of property which has spurred on rapid growth in both Sydney and Melbourne, particularly over the last few years, whilst Brisbane has been highlighted as the next best place to invest, compared to China’s major cities which have been trending downwards.

If China’s economy does not pick up and instead plummets even further then this is sure to affect Australia’s economy and reliance on Chinese foreign investment. We will just have to wait and see whether this will have a negative or positive impact on Aussie real estate.