A new China Factor

Last week I looked at the sharemarket in the eyes of overseas institutions that have received a serious loss of wealth given the twin falls in our sharemarket and currency. I believe it helped a lot of people understand what could happen this week.

But, of course, the sharemarket decline is now much more a global event. Most commentators focus on the fact that this is all about the pending end of quantitative easing and the fact that traders have artificially boosted stockmarkets using the excess liquidity generated in the US and are now shorting the market.

While that is true, the markets are also warning us that there are some clear global dangers out there. But, on the local front, the sharp fall in the Australian dollar will have some dramatic effects in both share values and housing. Let’s start with the sharemarket, but then focus on an area that does not initially come to mind in this fall – housing.

The fall in the dollar enhances the earnings prospects of the major miners led by BHP, plus industrial companies like CSL, Computershare, Amcor, Ansell, Sonic Healthcare and Incitec Pivot. But globally it is a warning that there are severe dangers in Europe. There are more bailouts required for Greece, Spanish bonds are one step away from junk, and the German courts will determine around September/October whether the European central bank bailouts are constitutional. In my view, Europe is where the next crisis will come from, and the sharemarket fall has increased that danger..

Chinese housing boost

On the local front, this week I want to look at the housing market from the viewpoint of Chinese investors. Mainland Chinese have been big buyers of apartments in both Sydney and Melbourne and they have been in this market for a long time. Much of the buying in linked to education of their children, but a lot of it is simply a diversification of assets. Nevertheless, in the last 12 months, and particularly in the last three months, the Chinese have taken a severe beating in our markets and that will create a degree of nervousness in future months and years.

The Chinese government has been attempting to curb the rise in dwelling places in China, but according to the Knight Frank global house index in the 12 months to March 31 Hong Kong dwelling prices rose 28% and those in Beijing/Shanghai rose 23.8%.

Click to enlarge

In China, the rise was particularly big in the last three months where prices rose 10.7% (Hong Kong 5.1%). So those Chinese who invested in Australia, rather than buying more Chinese property, missed out on big local gains.

By comparison the Knight Frank index shows that over the 12 months to March 31 Australian dwelling prices rose 2.6%, and only 0.1% in the final three months to March 31.

Worse still, measured in American dollars, those mainland Chinese who bought Australian apartments suffered a severe currency loss in the last two months as the Australian dollar fell from $US1.06 to US91 cents. This will make Chinese investors in Australian apartments rather nervous, particularly as all the indications are that our currency has further to fall.

Of course, back in China the government is most disturbed by this rise in Chinese dwelling prices, particularly the rise in the final quarter in the year to March 31.

The government has already been taking steps to curb dwelling price rises because of the social impacts. The Chinese economy is slowing and there will be pressure for the government to stimulate it, but any stimulation will further boost dwelling prices and if the government contracts the dwelling prices it will accelerate the downturn.

It is not an easy situation for the Chinese, but it is very clear that the Chinese believe there is much greater long-term security in bricks and mortar (despite the overbuilding and empty apartments) than in the volatile sharemarket or in cash, where you get no return at all. To some extent the same applies to Australia. Once our currency stabilises we are likely to see a Chinese investment move over here because our dwelling prices have been made more attractive by the rise of those in China and the fall in the Australian currency.

But before you race out and buy apartments in the anticipation of the Chinese increasing their buying rate, be aware that the sort of losses they have suffered will make them nervous for a while – a similar feeling to overseas investors in the Australian sharemarket. On the Australian housing construction front, Australia has started to import kitchen cabinets and other housing imports. The prices will rise.

Click to enlarge

The sharemarket’s property effect

My friends in the property industry always says that there is no link between the sharemarket and the property market. And while that is true for relatively minor movements, a major decline or rise usually sees the residential property market responding about 12 to 18 months later. It is simply the forces that drive the sharemarket in one direction and that eventually hit the property market.

I don’t think the Australian stockmarket has fallen far enough to make a substantial change to the dwelling market, even though in combination with the dollar our sharemarket is now down more than 20%.

But the stockmarket fall – even though it is in part the quantitative easing events in the US – will have an impact on the total Australian economy, and in due course on dwelling prices.

The Reserve Bank is clearly of a mind to cut interest rates further should the lower sharemarket be right and point to a rise in unemployment as part of a decline in the economy. Interest rates for housing are already low, and the fact that our house prices have not responded with big rises means that they are becoming more and more affordable.

At the moment a friend of mine wanted to buy an investment house and found the banks absolutely crawling over him to lend him the entire consideration, and more if he wanted it. So the money is there. It is very easy to imagine that in the euphoria that will come with Tony Abbott being made Prime Minister we may see a rise in the market. Dwellings are long-term investments and, as in China, the gyrations of the sharemarket are turning more and more people to this form of investment. Cash is simply not returning enough, so the capital ends up going to either commercial property or more likely residential housing.

That is why it is very dangerous not to own a house for residential use, and it makes sense to have a portion of your investment portfolio in a second house. The market that is best geared to perform is the Sydney market. Western Australia is a very dangerous market at the moment because of the slump in mining investment, and Brisbane may also be affected by the lowering of the coal investment. Adelaide had been depressed by the mothballing of Olympic Dam. However, once the Sydney market begins to rise it will take many of the other markets with it, particularly Melbourne. Remember that the housing market is an indicator of people’s confidence.

United States house prices have seen a 10.2% increase at the end of March, and that rise is a reflection of the view that the US is well past the worst and has a future ahead of it. It will need to get over this end of quantitative easing. Not surprisingly, those in Europe are voting the other way. Almost every other country in the European Union has suffered lower house prices in the 12 months to March 31.

And that indication of consumer sentiment plus the sharemarket fall means that Europe is clearly our biggest danger.