Wednesday, November 18, 2009

Are Chinese buyers affecting house prices?

Respected economist Alan Wood notes here why he believes small increases in foreign investment in the Australian real estate market will not have a tangible impact on home prices.

While it is nice to have a little calm to a situation that is sure to encourage exaggerated media spin, I’m not sure whether Wood’s claim holds - that because Chinese investors are a small percentage of buyers there will be little to no impact on prices. If we make one assumption, that Chinese buyers are willing to pay more than local and other foreign buyers, then his claim completely breaks down.

The following stories might help explain why.

Imagine an auction. In the scenario without the Chinese buyer it will sell for $500,000, which is $1,000 more than the second bidder was willing to pay, but is actually $10,000 less than the winning bidder would have paid had they needed to.

Now in the same scenario add a single Chinese buyer also willing to pay $510,000. They will bid up the price to $510,000 against the winner in the previous scenario. There is a chance they will buy it, but also a chance the winner from the previous scenario will buy with a token small bid.

So we can clearly demonstrate that 1) a single buyer entering a market willing to pay more than other potential buyers can drive up prices, and 2) these new buyers do not necessarily have to buy, simply 'bid up the market' to have an impact.

How about another scenario?

Imagine you have a train ready to leave the station. There are one hundred queues (one at each door). Each person must pay the market rate for a ticket which has been established over time to be $5. If they aren't willing to pay the market price, there are plenty of other people willing to pay the market price to take their place.

Now one of those queues (1% of the market - the Chinese buyers perhaps, maybe the first home buyers) decides they are willing to pay $6 so that their queue will move faster and they will get more seats on the train. Now, the market price moves to $6, and any other person from any other queue will have to pay $6 to get on, or let the train fill people from the Chinese/FHB queue. Some people from the remaining Aussie queues pull out, but there are still plenty who are willing to pay the $6 for their spot on the train. Indeed some even believe if they pay $6, they might be able to scalp their ticket for $7 a bit later if the price goes up again.

I believe there is no theoretical basis for the assertion that because buyers willing to pay more are small % of the market they do not impact prices.

Of course, this all rests on the assertion that the small number of Chinese buyers are in fact willing to pay more than other buyers.


  1. There are always idiots in the market willing to pay above market prices out of stupidity or emotional reasons. There are also speculators that are willing to pay a premium based on their optimistic predictions. This tyranny of the minority over the majority has always existed, and is probably an important market force.
    Let’s assume that there is a 95%-5% distributation of shrewd to idiot/premium payer buyers in the white Australian market (actual values are totally irrelevant). We are then assuming that the same statistic for the Chinese segment has a larger portion of idiot/premium payers and therefore skewing the total market statistic. Is this true?
    We cannot see an investors market predictions, or the stupidity of a wealthy elderly gentleman, but we can see the colour of their skin. This discrimination is not supported by facts (no fact checking was done – I just checked with my gut) and is based upon a vague idea that China is buying all our resources, is the US’s largest creditor, and has many people with a lot of money. Then it just takes a couple of slanty-eyes (standard 95%-5% dist.) paying stupid prices to confirm our dormant discrimination.
    If anyone can show me proof that the Chinese in general are not particularly shrewd business people and in fact just stupid yellows with too much money – I may be able to convince my gut without vomiting its contents into the driver’s seat of the next horribly ignorant bogan’s commodore. I’m off to develop a drug that I will put into Australia’s water supply – this drug will change the colour of your skin based upon your level of ignorance, intolerance and nationalism. Then we’ll have a war.

  2. Cameron, Chris's gut wrentching tale is a hard act to follow.

    I'll help you here, if you add anyone or group of people who is/are prepared to spend more at an auction or private treaty transaction, prices will increase. However you must remember that the Chinese buyers are not buying Australia wide, just in pockets, so the national effect will not be that great.

    Added to that is the tendency for gross anecdotal exaggeration because of racial fears (ridiculous fears but still fears)

    I can see that you are struggling a little to put your economic theories into practice, but at least your heart is in the right place.

    Google "Shenzen house prices" and you will notice great instability in their market.

    Also research Hong Kong house prices and compare them with ours. EG St Lucia as you should be familiar with prices there. Our prices may be high in comparison to China, but our market is stable.

    Also compare earnings in China with home prices.

    Do some research on the Japanese real estate buying spree during the 1980 - 1990 period. The Gold Coast, Cairns and Brisbane were targeted then. You will notice a repetition of history which may have some interest for you.

    Best of luck Cameron.

  3. Thanks for the comments Chris and Peter.

    Chris, you don't really need proof that Chinese buyers are not shrewd business people to demonstrate there will be a price impact. As I have shown, any increase in the number of competitive buyers can impact prices without actually buying any property by being a new second bidder.

    Maybe I wasn't clear about my purpose - which is to try and explain that prices are set at the margin, and although a group (FHB, foreign buyers or just idiots in general) may comprise just a small part of the market, they still have an impact. Hence, Wood's argument is flawed, although is intention (to calm racial hysteria) was very noble.

    Peter, I agree with you here! Compared to, say, European buyers, the stablity of the Australian market is attractive to Chinese buyers. And some areas do seem to be more targeted than others.

    I personally don't have a big issue with foreign ownership of property, as long as there are reciprocal dealings (China relaxed the rules on foreign ownership in Beijing this year I believe).

    So Aussies can take of advantage of the slump in Chinese real estate (for example

  4. Cam, I see your point now - since the market is finite, any absolute increase in high-price payers will augment prices. I was trying to argue that Chinese buyers are no different to Aussie buyers - but their sheer presence in the market in absolute terms creates the effect.

    In this case (new argument, same basis): We should be against any population increase in the wealthy class in Australia (This should be in our anthem anyway - a pure Australianism!)? Any increase in absolute terms of the population of wealthy people in Australia will inflate real-estate prices, be it foreign or local.
    Is it a good position to have as an economist to be against wealth creation?

    I have seen in the comments on Alan Woods article that some people believe that we shouldn't allow the Chinese buy property in Australia since we aren't allowed to buy property in China. I find this argument flawed. Should we also use capital punishment against Thai drug couriers caught in Australia, since Australians are subjected to brutal Thai laws?

    Real-estate has become a game for the rich, and like any other ponzi-scheme, we need richer and richer people to keep the scam fueled, lubricated with the futures of our children and spewing the Australian dream from the exhaust.

  5. I think what I wanted to say is that the underlying problem is not the Chinese, but the growing wealth gap in Australia.

    Let's take Norway for an example (I take this example reluctantly - I don't want to be grouped in with these limp-dicked left-wing socialist-because-Che-is-cool types who think Nordic countries are Utopia, but because I have recently spoken with a Norwegian about their real-estate market): We all know Norway is a wealthy country. It is common for students to buy apartments either alone or with a group of friends. Don't get me wrong - it is still expensive, but the barrier to entry in low. They have a very stable market and banks will give loans pretty easily.

    There are two important factors here (not independent of each other): Stability of the market, and wealth gap. Australia's market is unstable. Unstable in an upward trend. This is bad for us. Not for the rich ponzi-scheme whores, but for us - 90% of Australia. Sure if you can get into it, you are good as gold. But an assured return of 10% p.a. for the past 25 years not taking rental income into account? Stable you might say; housing prices increasing against real wages for the past 25 years? and the next 25 years? That's the domain of ponzi-scheme whores.

    On the front page of the newspaper in Munich yesterday was a photo of students protesting against higher student fees, holding up a banner 'Rich parents for everyone'. I thought that was a great slogan.

    Anyway, the problem of the Chinese is OUR problem and not theirs. We should get our shit in order and then the Chinese problem would disappear.

    *As usual minimal fact checking was done - just checked with my gut.