Oz and China – speculators paradise.

Just a quick further note about Australia’s property boom and China’s role in it.

I think events in China are going to cause a year or so of super-property inflation in Australia. Greed and stupidity will combine as they always do, everywhere, to convince those making the most money that it will never end. And then it will. Suddenly and catastrophically.

The reason to think about this is simply that Australia is quite large enough to cause a global problem if it has a bust. And I think, the actions of BOTH the Australian and Chinese governments are going to cause one.

Basically, Australia has become a destination of choice for hot money from China, By hot money I mean wealthy Chinese, investors, banks and even regional governments who want to invest/lend outside of China and, more importantly, outside of Chinese government control.

Here’s the story.

The Chinese central government has been trying to reign in its own property and bank bubble and instead get more money lent for job creating enterprises that might help crate a domestic market. The banks, local officials and those with money, however, all want to make easy money and more of it by far, by speculating. Easiest is to speculate in Chinese property. Only problem is when the Cental government tries to clamp down as they have been. The solution then, for those with connections and cash, is to speculate in Australia.

Australia’s response? Last year the Australian government eased restrictions on foreigners buying land and property. Cynics suggested this was done to intentionally to drive up a property bubble in the face of a global property recession. What is sure is that this action took an already large property bubble and turbo charged it.

Some figures help. 1990 property bought as an ‘investment’ (read property speculator) accounted for about 16% or $31B Aus. By ’08 that had grown by 2400%! It was by then about 31% of a trillion dollar bubble ($310B Aus). The proportion of the speculator investment which is foreign and specifically Chinese has also grown. Today there are streets in some of Melbourne’s wealthier suburbs where 80% of the houses are Chinese owned.

Fantastically, land and houses are still CHEAPER in some of Melbourne and Sidney’s best districts than in similar districts in China’s main cities. Which says to me that Chinese money looking for huge returns will continue to flood into Australia. In fact I think it will accelerate because while the Chinese government is trying to slow speculation down, in Australia they are already too frightened/greedy to stop. Mortgage debt in Australia is now at an astonishing 140% of GDP and 130% of household income. Which means Australians as a whole owe more on their property than they earn. That is a bubble.

How will it end? Well of course those making easy millions will say, as did their counterparts in the US a few years ago, that it won’t. And for a year at least they are going to be correct. Because yesterday the Chinese Ministry of Land and Resources banned the sale of ANY land for building housing. It is a temporary ban but imagine if our government did the same.

What does this mean? Well, I think it can only mean that MUCH more speculative cash is going to be coming Australia’s way. There is just too much of it around and there is too much pent up greed driving it.

So Australia’s bubble will grow. This will make Australia seem immune to the global downturn. The government will talk about doing something but won’t dare. But China will dare.

The day China manages to stop the flow of its hot money, by putting their hands firmly around the regional banks necks, then OZ will implode.