Chinese money is driving a housing glut

A flood of Chinese capital is funding developments in select locales of Sydney and Melbourne, but dangers lurk in the potential oversupply in the apartment market.

When you buy residential real estate in inner city and suburban areas in Sydney and Melbourne where Chinese buyers are active, the price is often 10 or 20 per cent higher than ‘non-Chinese’ areas.

Behind that difference are call-centre engine rooms creating strong demand. It is also a market that carries hidden dangers.

Last week, I was yarning with old friends in the property business who had recently walked into a call centre in the middle of one of the most popular Chinese property buying suburbs, Melbourne’s Box Hill, and discovered tens of people talking in Mandarin and other Chinese dialects. There are similar centres in Sydney, where people are on the phone to residential dwelling buyers in Shanghai, Beijing and Guangzhou. 

At the same time, there were other Chinese operators handling the visa business. It is now much easier to get a visa to enter Australia and to gain residency by spending $5 million. The people involved in visas are much less likely to be simply buying existing real estate. There is a series of rules covering visa-related investment and the Chinese must buy or develop a business or develop a property. My friends’ experience indicates much of the visa money is going to go into property development.

In Melbourne, houses in Beaumaris and North Balwyn once had similar values, but North Balwyn has now soared ahead. The Chinese do not buy in Beaumaris. Similar stories abound in Sydney.

John Lee has indicated that a lot of the Chinese money coming here is coming via back-door routes (in other words, not officially being encouraged), although Chinese regulators are turning a blind eye (Capital flight is China’s house of cards, February 12).

Other major global cities are also experiencing big rises in Chinese real estate purchases, but a limited Australian market makes it more prominent here. 

As it turns out, the building of apartments in Melbourne and Sydney funded by Chinese developers is a welcome addition because it is keeping our building industry going while we wait for the tortuous process of getting infrastructure projects going. 

This is one of the biggest changes our society has seen the last 50 years.  We have often experienced periods where large overseas corporations made major investments in Australia. The Japanese property purchases in the ‘70s and ‘80s are a good illustration. (They later sold out and incurred big losses.)  But never before have we seen a flood of capital into the country in smaller lumps and often associated with residency. 

If it continues, it will result in a significant change in the property-related Australian business community. It would be excellent if some of this money was devoted to encouraging start-ups, particularly technology start-ups. But I suspect there will be a series of apartment blocks built and at the bottom of those apartment blocks will be a retail store – very often, a Chinese restaurant. 

One of the potential problems is that the Chinese developers concentrate their efforts in smaller geographical areas of Sydney and Melbourne, where they are building a vast number of one and two-bedroom apartments. There is a good market for these apartments, but they have limited appeal once a couple begins to have children. 

I can feel a looming glut. Indeed, we had warning from Harry Triguboff that there were signs in Sydney that more land was becoming available as councils realised the damage they had created in holding up development.

And as the land becomes available, there will be a large amount of Chinese capital ready to develop it. And it might all happen at once. That’s what creates temporary surpluses (Sydney’s property dam is about to burst, January 21).

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles