'Whipsaw' risk for Auckland house prices as Chinese economy slows

Thursday 16th July 2015

The Auckland property market could suffer a 'whiplash' correction if current high capital outflows from China are curbed by the Chinese government, says an economist with a global investor client base.

Andrew Hunt of Hunt Economics told BusinessDesk he believes the Chinese monetary authorities are already starting to close the avenues through which large quantities of Chinese private investment capital has been leaving mainland China in recent times in response to a sluggish local economy and ballooning national debt levels.

In the meantime, however, Hunt suggests governments in countries where foreign investment is accentuating property price booms would be justified in enacting new policies to offset the impact of such investment.

Among proposals reported by real estate market observers in debate this week over the role of foreign investment in skyrocketing Auckland real estate prices, is to charge stamp duty on real estate transactions involving foreign investors.

"I think the danger for places like Auckland is that those capital flows gather pace and have an unwanted externality effect on property prices in Auckland, Sydney, maybe even London, or the west coast of the US," said UK based Hunt in Wellington. "For what it’s worth, I think if you’re facing an externality as a policymaker in one of those recipient countries, economic theory says yes, you can take appropriate fiscal action. I think a stamp duty that was used to finance either some form of Kiwi future fund that was invested offshore or dumped into superannuation schemes or infrastructure spending in Auckland, would be probably worthwhile.

"In Ireland, when money was coming in from China, there was a kind of stabilisation fund established so that impacts were offset by automatic outflows."

Hunt doubts the accuracy of Chinese official economic growth figures released this week, which showed an ongoing annual growth rate of 7 percent, with a welter of data from major exporters to China showing weakness consistent with growth of more like 4 percent a year.

"We’re looking at a Chinese industrial sector that is essentially flat lining and you can see that in the bottom-up data from China but in the capital goods shipments from Germany, the exports from Japan, the commodity inputs," said Hunt. "There’s a wealth and a majority of global economic data that supports the idea that the Chinese industrial complex is not really expanding at this point and you wouldn’t expect to, given what’s happened to the credit system and local government."

Capital expenditure by local governments, a major driver of Chinese growth since 2009, has effectively ground to a halt, Hunt said, who doubts widely accepted conventional wisdom that the authorities in Beijing can "just pull a few levers" to engineer a faster growth rate, and that China is heading into a three to five year period of much lower growth.

"I think they’ve pulled those levers already," he said. "The monetary levers have been pulled. Fiscal policy is constrained by the existing debt burden and the ongoing budget deficit. They could pull the currency lever. That’s quite deflationary for the rest of the world, but I think they may end up doing that.

"For China to get a weaker currency just means intervening less to hold it up. It doesn’t mean intervening to push it down, it’s intervening less to support it, thanks to the capital outflows that are boosting the Auckland property market or repaying their debts.

"Typically the Chinese economic cycle goes up for four to six years and then stays down for three to five years," Hunt said, with international markets often slow to recognise turning points.

Weak Chinese demand for commodities is one of the major factors in the precipitous fall in the global price of dairy commodities so far this year, with last night's GlobalDairyTrade auction showing what AgriHQ called a "disastrous" 10.7 percent fall and consensus among analysts that Fonterra Cooperative Group will cut further its forecast payout for the new dairy season.

Commentary from Wellington funds manager Harbour Asset Management called the GDT result "truly awful" and could lead to the Reserve Bank cutting interest rates by 50 basis points to 2.75 percent at next Thursday's review.

"Whilst the New Zealand dollar has corrected in recent months, the moves in dairy commodity prices are even larger and the differential between the currency and our key export commodity is again significantly stretched," said Harbour Asset. "With dairy prices causing a drag on economic growth and fundamentals changing, we suggest investors think about currency volatility and potential lower domestic growth when constructing portfolios."

BusinessDesk.co.nz

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