Australian housing market insulated from Chinese slowdown risk by slow rate of new home building: Analysts

The slow rate of new home building in Australia – much lamented by industry bodies – could actually insulate the housing market from collapse should there be a sharp slowdown in the Chinese economy, according to banking analysts.

March quarter figures released on Wednesday by the ABS show that the new housing construction sector declined for the fourth straight quarter, with the value of new residential building work done falling 1.2% to $9.29 billion on a seasonally adjusted basis, following a 1.7% decline in the December 2011 quarter.

Concerns have been raised that a drop in Chinese demand for Australian coal and other raw commodities as result of the Chinese economy slowing further could have far-reaching consequences for the wider Australian economy and demand for housing.

In March this year, credit rating agency Standard & Poor’s warned that Australian house prices could fall 20% this year if Chinese growth stalls to 5%.

But in a recent report, Citigroup strategist Tony Brennan said that major housing corrections, defaults and foreclosures often came after periods of excessive home building, leaving an excess supply of housing that put downward pressure on prices.

However, he says Australia does not show indications of over-building of homes.

Merrill Lynch equity strategist Josh Kirkwood expects no change in Australian house prices over the next three years due to the level of deleveraging and changing attitudes of investors.

He disagrees with people who believe the Australian housing market is bulletproof, but says there won’t be a house price crash as occurred in the US, the Australian Financial Review reported.

The latest figures released by the Chinese government’s National Bureau of Statistics and reported by Savills show that while China's real estate investment growth slowed sharply in the first half of the year, “dragging down the broad economy”, property sales swung into positive growth in June for the first time in eight months.

Savills says this “bodes well for a recovery in the sector, which could ease concerns about a hard landing of the world's second biggest economy”.

Real estate investment, which affects more than 40 other sectors from cement, steel to furniture, grew 16.6% from January to June versus an annual rise of 32.9% in the same period last year, the National Bureau of Statistics.

Fears of a flow-on effect for Australian prices have been expressed not just in relation to China, but also as evidence shows significant house price falls in the United States and Europe, most notably Spain.

Fund managers have suggested Australian investors look offshore due to the high dollar and discounted real estate.

“If you have an Australian dollar above parity and housing prices in America which are down 50% [since the GFC], it is a far easier decision to invest your money overseas than here,” says Ashley Pittard, portfolio manager at PM Capital.