Will an Evergrande collapse impact Australian property?

Evergrande is China’s second largest property developer, and the latest reports of a debt default have again spooked financial markets, raising renewed financial stability concerns. The full implications of the default and Evergrande collapse cannot yet be known.

Chinese debt default

Evergrande has been prominent in the news for some time, and the reports of official default will renew concerns about whether a successful restructure can be carried out.

The dynamic is likely to be different from when Lehman collapsed because Evergrande and Kaisa are property developers rather than investment banks. There is also likely to be a significant government intervention as authorities scramble to contain the fallout.

The bigger question is whether there will be a global impact from over-leveraged Chinese developers and corporates, which is less clear at this juncture.

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Local sentiment solid

Local sentiment tends to be the key driver for the local property economy and housing market. What we’ve seen in 2021 in Australian property is a fear of missing the boat, as prices have risen across every capital city by about 20 per cent on average.

Local sentiment tends to be the key driver for the local property economy and housing market.

There are now record numbers of scheduled auctions, and new market listings have surged in Sydney and Melbourne – so there is much more choice for buyers coming online, and there’s an attractive window of opportunity to buy property before immigration ramps up again.

Homebuyer sentiment is much more balanced now, but investors are still champing at the bit.

It’s clear that fixed-rate mortgages are now rising, though we haven’t seen any increase in variable rates just yet.

Figure 1 – Fixed mortgage rates rising
Figure 1 – Fixed mortgage rates rising

It’s worth remembering, though, that with all the refinancing that’s been going on this year, the average mortgage rate being paid across all outstanding loans is the lowest in history. 

Figure 2 – Declining borrowing costs 
Figure 2 – Declining borrowing costs 

We expect to see a more balanced market in 2022, but rental vacancies are so tight that rents will probably rise at a double-digit pace, and investors will be very active, in turn pushing prices higher. 

Rates lower for longer 

If the Evergrande and Kaisa fallout escalates, interest rates could stay lower for longer. Interest rates at the zero lower bound were always stimulatory for Australian property, especially for investors seeking returns.

It’s quite possible that Chinese debt defaults could damage confidence in financial markets globally, particularly if there is a growing fear of contagion. However, generally speaking, the experience in Australia is that domestic factors will have a far more material impact on housing market sentiment and trends, and sentiment is very positive in housing.  

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