How Easing Capital Controls in China Could Affect Australian Property

Here’s a rule of thumb for you: Don’t listen to what billionaires say; watch what they do. That’s what analyst and author Jim Rickards told the crowd at the World War D investment conference earlier this year.

Rickards was referring to Warren Buffett’s $26 billion dollar buy of railway company Burlington Northern. Rickards said that, more than anything, this was a move out of cash and into hard assets — and all of us should take note of what he was up to.

The billionaire principle is a good one. So I was interested to see this in Wednesday’s Australian Financial Review:

‘Rich listers who made their money in different industries are piling into property faster than ever…the total value of property on this year’s BRW Rich List, to be published on Friday, is $16 billion…eleven of the property barons are billionaires.’

Hold that thought. The Review also reported NAB is moving aggressively into the $1.3 trillion Australian mortgage market. The bank is offering a new trailing commission to mortgage brokers. The article goes on, ‘NAB is also aiming to double the value of mortgages written by its call centres from $3 billion last year.’

Land value and banks, dear reader. This is what you should be watching. These are the keys to the economy. One way to watch them is to devour the papers and mountains of data online, as my colleague Terence Duffy does every day. Or you could do it the easy way and subscribe to Cycles, Trends and Forecasts  — because that’s exactly what we’ll be doing for you with this service.

NAB’s traditional area of focus has been business lending. That’s probably the reason its share price has mostly gone nowhere over the past decade. Yes, dear reader, the big money is in capturing the economic rent , just as our colleague Phillip J Anderson points out. CBA and Westpac have long been the mortgage market leaders here in Australia. They won’t give up their turf easily. CBA’s share price hit all-time highs this year, after all.

As Phil says, so far it’s been a pretty wild start to the real estate cycle  since the recovery out of the global collapse in 2008.

And if you ever need a reason to see why it could really go over the top when the time comes, we’ll take a stab at it: China. There is a mountain of Chinese money that might go looking for a home here in Australia over the next decade (and the US, UK and Southeast Asia). One of our colleagues in the US, Rob Marstrand, has done some research on this.

He summarises the Bank of England, which recently wrote a report on the subject. They believe a realistic scenario is for China’s external assets and liabilities to increase from 5% of world GDP in 2012 to 33% of world GDP by 2025. That’s an interesting date, as Phil’s subscribers now will know.

That’s potential $20 trillion sloshing around the world over the next decade. Its most likely destination? Stocks and real estate. And as Phil points out, it will flow mostly to places where buyers know they can get their money back out — countries with the most secure property rights, like Australia’s property market.

For now, a lot of Chinese money is trapped in China. That’s because capital controls from the Chinese Politburo keep it there behind a financial ‘Great Wall’. This makes it difficult for Chinese to invest in overseas assets. But capital controls always and everywhere cause distortions because they retard the natural market. China is no different. Those distortions manifest inside China.

To get rid of them, the Politburo knows they must open up China’s market. In the 12th Five Year Plan, they indicated this would happen. This policy, I’m led to believe, was reaffirmed at the Third Plenum held in November 2013.

Presumably, there is another mountain of vested interests that will try to preserve the status quo that is enriching them, so we dare not be sure of anything. But the major question to ask is how long this ‘Great Wall’ blocking a serious amount of money flooding out of China will be held in place — and whathappens when they pull it down? The precedent is the international buying spree Japan went on in the late 1980s. People said that the Japanese nearly bought half of Queensland at the time.

Sydney might become like London — full of billionaire mansions. The only catch is, you’ll need to make a choice. Which side of the equation do you want to be on: renter or rentier?

Regards,

Callum Newman
for The Daily Reckoning Australia

Read the rest of this article at The Daily Reckoning