So, what’s the deal with Sydney housing prices?

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Cranes in progress – building the apartments of tomorrow at Green Square in Sydney South

For most professionals looking for inner-city living in luxury, look no further than Green Square on the Airport/East Hills line service, at least if you buy the rhetoric of Crown group, Mirvac and a host of others.  These developers seem intent on ensuring that Australia’s property market emulates Icarus and flies too close to the sun in the physical sense, but does that mean joining many others in a long line of failed or failing capitalist economies?

Property developers have been riding high on a wave of Chinese investment in Australian property, in particular, the boom in “luxury” apartments in or near the CBD has seemingly taken off, specifically in the last 3-4 years. People are often perplexed as to what has brought about this sudden impetus of foreign investment, and what correlation it has had to wealth creation in China. It wouldn’t happen to have anything to do with the fact that our currency had dropped 20% against the Chinese Renminbi perchance? At its lowest, the AUD was down over 30% in 4 years –  at the end of 2015.

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Drop it like it’s hot – the Australian and Canadian dollar now down 21% and 17% respectively since 2012 even after the resurgence of CNY against both, with the USD appreciating during that period by 8% – Bloomberg

My suspicions as a trader were that the sudden boost in investment in Australian property was due to the appreciation of the onshore Renminbi (CNY) against the AUD. This seemed to be corroborated by the above exchange rate so I then set my sights on finding out the change in the level of Chinese investment after 2013. I was also interested in what this meant for other western economies with similar desirable capital cities to Sydney (Toronto, New York etc.). Funnily enough, the cities among the highest prices in the world also happened to have low exchange rates against the Chinese Renminbi!

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Bang – decline of Chinese investors in U.S. real estate in line with the strength of the USD

Since the beginning of 2016, however, the Renminbi has weakened – and it comes as no surprise that investor demand has also weakened from China. If the US does decide to have a trade war with China, it is evident that the section of real estate being propped up by Chinese investors would bear the brunt of the collateral damage, as the only way to have a trade war in this day and age is to debase currencies and impose import tariffs and other barriers to trade.

I believe that Xi has recognised this pitfall of the American economy and welcomes a trade war is it would ultimately cause the next financial crisis for the US – primarily due to the fact that the mortgage derivative products floating around now are the same ones that caused the GFC by another name, and have a very similar if not identical structure, although I’ll focus on that in another post.

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Hmm: it is extremely interesting that the capital outflow peaked at the end of 2015, right about the time that the Renminbi was at its highest against most currencies (CAD, AUD, EUR etc.)

So what do we take from this? Chinese investment is directly proportional to the strength of the Renminbi, and not necessarily the prestige or “luxury” of the city. When there is a western country that has a weak exchange rate against the CNY, expect there to be Chinese investment. For Xi Jinping, debasing the currency is the easiest way to ensure that Chinese investors don’t get any smart ideas about trying to make themselves wealthy at the expense of his country.

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