Rapidly cooling house prices in Sydney and the sudden withdrawal of Chinese investors from the property market may lead the Reserve Bank to cut interest rates, according to investment bank Credit Suisse.
- Chinese capital flows closely correlated to Sydney property and point to an on-going cooling of prices
- Sydney clearance rates now at the break even point where prices fall
- Credit Suisse argues the RBA may be under pressure to cut rates if Sydney property falls as expected
Research conducted by Credit Suisse’s economics and equity teams found Chinese capital flows are tightly correlated to Sydney housing prices, with movements impacting property demand 12 months down the track.
“Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold,” Credit Suisse wrote.
“Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls.
“This fall foreshadows weakness in NSW housing demand in the year ahead.”
Auction clearance rates are at price tipping point
In recent months, preliminary auction clearance rates have drifted lower to 60-65 per cent from about 75 per cent last year.
More importantly revised auction clearance rates — accounting for late reported results — have even dipped below 60 per cent.
“This is a significant development because recent RBA analysis suggests that a 60 per cent clearance rate is typically the break-even point for house price inflation,” Credit Suisse noted.
“In other words, house prices tend to fall when the clearance rate is below 60 per cent.”
While it is difficult to pin-point the exact impact Chinese buyers have on price, Credit Suisse said its modelling found that Chinese capital flows and real interest rates predict roughly three-quarters of the variation in NSW property transfers since 2010.
Local investors have been chasing Chinese momentum
Moreover, the relationship between mortgage availability — that is the banks’ ability and willingness to lend — and auction clearance rates, apparently, has broken down.
“Mortgage availability has plummeted to levels historically consistent with a collapse in clearance rates to around 20 per cent — yet actual clearance rates have remained elevated at 60-80per cent,” Credit Suisse said.
On the other hand, anecdotal evidence such as lower online interest for Australian property coming from China and real estate agents reporting large sales declines in the sector all point to a reduced Chinese buying activity.
“The failure of local variables to explain the housing cycle suggests that there must be a strong foreign component to demand,” Credit Suisse said.
It said at a micro-level, Chinese buyers drive up valuations in certain areas such as expensive suburbs and apartment blocks.
“But this has positive spill-over effects for pricing in other segments of the market. We believe that Chinese buyers spark the cycle, while local investors chase the momentum,” Credit Suisse said.
New home sales continue to fall
A further indication of a loss of momentum in the property market was another weak reading for new home sales in September.
Housing Industry Association figures show sales grew more than 6 per cent over the month, with multi-unit sales down 16.7 per cent.
New home sales data is regarded as an important leading indicator in the property market and appears to have peaked in March.
“This process of adjustment will involve a sizeable reduction in building activity on the ground,” HIA economist Shane Garrett said.
“We expect that activity will bottom out sometime in 2019 with a recovery then setting in — assuming the economy reverts to its long-term average growth rate of around 3 per cent,” Mr Garrett said.
RBA may have to cut
Credit Suisse said the Reserve Bank was in a difficult position because of lack of timely and accurate data about Chinese capital flows, but the drying up of offshore investment is “a very big risk” to the economy.
“We understand that policy needs to be set on what is known, rather than what is unknown, and Chinese capital flows are a very big unknown because of the absence of high-quality and timely data,” it said.
“But the issue for us is that the recent shift down in Chinese capital flows is having a visible, negative impact on house prices and consumer spending now.”
Credit Suisse argued if its model was anything to go by, it is hard to see a meaningful recovery any time soon.
“We believe that the RBA will need to cut rates further to deal with the housing market slowdown in train,” it noted.
“Without a healthy housing market, the economy does not have other growth drivers to lean on.”
By Stephen Letts