Not too long ago we looked at How The Royal Banking Commission Could Burst The Housing Bubble. While the Royal Banking Commission is still ongoing and the housing market hasn’t fully crashed just yet there’s been a few more interesting developments that have occurred.

The first one actually happened way back in the start of 2017. Due to huge amounts of Chinese capital flowing out of the country that threatened to devalue the Yuan, their central banks started restricting off shore investment and money transfers to slow the tide. Later on they introduced laws where a single person could only withdraw around 100,000 Yuan ($20,500 AUD) a year, regardless of how many separate bank accounts or cards they had.

As far back as January 2017 Who Crashed The Economy predicted that it would put a severe damper on the Australian property market.

The agents are already witnessing a substantial drop off in demand. Many Chinese view property with a tour group, but only half the number of buses are filled this year.

While the Chinese aren’t the only big foreign property investors here in Australia – the USA is also quite large – they certainly count for a big chunk. Maybe this severe shock would be too much for the ever bubbling Australian market to bare?

The Results Are In

Source: Foreign Investment Review Board (FIRB) Annual Report

Over a year later and we can now see just what China can do when they put their weight behind a policy. According to The Conversation:

Whereas 2015-16 saw 40,149 approvals granted, totalling A$72.4 billion, the figure for the following year was just 13,198 approvals, totalling A$25.2 billion. On these numbers, the foreign property investment boom looks to be over.

That’s a 65% crash in just 1 year with more than $47 billion dollars – likely more – being removed from the active property market. Some 27,000 properties would have likely been bought by Chinese buyers which have now been added to selling stock.

It’s now starting to look like there’s multiple, serious stresses being placed on the Australian property market and the cracks are beginning to show. The ABC reports that it has posted its first annual drop in 6 years, led by the two (once) strongest cities Sydney and Melbourne.

Melbourne is now the worst performing Australian capital with it dropping 1.2% over the last quarter followed closely by Sydney dropping by 0.9%. Even new home sales are falling heavily as Business Insider shows with detached houses sliding 3.1% over the past year.

Death By A Thousand Cuts

Source: HIA

Having 65% of all Chinese foreign buyers ripped away isn’t the only thing doing this though. As mentioned prior, there are a number of subtle new rules that the governing bodies have introduced to try and make sure the big four banks are acting more responsibly.

This has resulted in them having to hold more capital in reserve which in turn increases their operating costs. That is then passed onto the customer with higher interest rates. They’ve also had to reduce the number of interest only loans they give out plus contend with ever increasing borrowing costs of their own.

On top of all this the Melbourne and Sydney prices have now sky rocketed so high that many first home buyers – and even existing owners too – are essentially priced out of the market. This reduces competition and thus, reduces selling prices and sales.

This result seems to be coming through loud and clear if auction clearance rates are anything to go by. Last year around March they were about 77% for both Sydney and Melbourne. Three months ago in March 2018 they had reduced to about 68% for both. Now in June 2018 they’ve dropped even more to 55% according to both and

Where To Now?

So we have the Chinese all but unable to buy property. Many Australian’s are also now priced out and unable to buy property to live in. Investors are also facing not just tougher lending terms, but higher interest rates which eats into their returns.

Then we have the potential for the Royal Banking Commission to drop a totally separate bomb if they decide to increase the amounts banks must assume their customers spend on expenses. It’s all taking its toll and with this slow down turn there’s the very real possibility that the market can reach a certain tipping point where panic sets in.

Major news publishers like the Financial Review proclaiming that the “Sydney, Melbourne housing boom is over” doesn’t help either! Unfortunately it’s anyone’s guess at this point. While I still believe both Sydney and Melbourne are amazing places to live and that house prices do deserve to be high because of this excellent quality of living… I wouldn’t say they should be as high as they currently are.

The other important point is that markets are not rational. Shares and property will happily crash 40%, 60%, 80%. These usually represent pure panic and rebound after a year or two but it has happened plenty of times before. We all remember the GFC (I hope).

Hopefully the market can pull off a smooth, slow reduction in price over a number of years instead of crashing 40% in a few weeks though. A 3% drop year after year for 5-6 years would no doubt hurt a lot of investors… but it’d be a far better outcome for the overall economy. Whatever happens it’s going to be interesting to watch!

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