Chinese buying in Sydney has gone cold which could prompt RBA to cut: Credit Suisse

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.

Research conducted by Credit Suisse's economics and equity teams found Chinese capital flows are tightly correlated to Sydney housing prices, with movements typically impacting property demand around 12 months on.

"Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold," Credit Suisse advised, without giving any indication when the mooted cut would come.

"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."

It noted revised auction clearance rates — accounting for the many late reported results — had now dipped below 60 per cent in Sydney, the ABC noted.

"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.

Credit Suisse reported the relationship between mortgage availability and auction clearance rates had 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.

Anecdotal evidence suggest there is significantly lower online interest for Australian property coming from China.

"The failure of local variables to explain the housing cycle suggests that there must be a strong foreign component to demand," Credit Suisse concluded given Chinese buyers have previously driven 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.

Credit Suisse said the Reserve Bank was in a difficult position because of lack of timely, accurate data about Chinese capital flows.

But the drying up of offshore investment was "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."