We all know the strength of Australian property markets are underpinned by Australia’s economic prosperity and of course this is closely intertwined with China’s growth.
However, with the economies of many countries faltering, stories of a property bubble in China and of China’s growth slowing, some are concerned that stumbles in China’s economy could stunt Australia’s economic growth.
So let’s look at what’s really happening in China and what’s ahead. And more importantly what this may mean to your and my wealth…
Why is China growing so fast?
In 1978, after years of state control of all its productive assets, the government of China embarked on a major program of economic reform.
In an effort to awaken a dormant economic giant, it encouraged the formation of rural enterprises and private businesses, liberalized foreign trade and investment, relaxed state control over some prices, and invested in industrial production and educating its workforce.
The strategy has worked spectacularly well and now the People’s Republic of China ranks as the world’s second largest economy after the United States.
Over the past 30 years it has been the world’s fastest-growing major economy, with consistent growth rates of around 10%. China is also the largest exporter and second largest importer of goods in the world.
What’s ahead?
Since 1978 hundreds of millions of Chinese have been lifted out of poverty, yet there’s still a big job ahead, with hundreds of millions of rural population as well as millions of migrant workers still living on less than $1.25 a day.
As China goes through its industrial revolution it plans to move over 350 million people into its cities in the next 15 years.
If you think about it, this means they would be building the equivalent of seventeen Australia’s in the next 15 years. Now that’s a mammoth task and as Australia’s biggest trading partner, China requires massive resources to fuel this growth.
To help put some perspective on this, ANZ’s Paul Braddick suggests the following could happen in China between now and 2025:-
- 350 million more people will move to the cities – 103 million have moved since 1990
- 221 Chinese cities will have 1 million + people living in them – the whole of Europe has 35 today
- 1 million kilometres of new road and 28,000 kilometres of metro rail will be laid
- 170 mass-transit systems will be built – twice the number that all of Europe has today
- 40 billion square metres of floor space will be built to construct five million buildings
- 50,000 skyscrapers will be built (+30 stories) – the equivalent of building 2 Chicago’s every year
- 97 new airports will be built
- 1 in 7 planes assembled by Boeing and Airbus will be delivered to China
- 1,000 MW of coal-fired power capacity will be commissioned every week – equivalent to 4 million tonnes of new coal demand
- 1 wind farm turbine will be built every hour and a half
What’s happening there now?
China’s economic growth has been enormous, at around 9% per annum. While this is likely to drop a little over the next few years, the growth in some of its big cities is almost double that.
Interestingly, there are currently 16 cities the size of London in China. Cities I’ve never heard of.
Have you heard of Changsha, Chengdu and Chongqing? Neither had I.
What about Weifang or Wuhan?
Cities like these are the backbones of China’s 30 or so provinces, whose astonishing economic growth is largely responsible for keeping the world’s economy in the black. For example, the economy of Shandong province itself is larger than those of several G20 countries.
This is not only creating a new middle class in China but also a new group of very wealthy individuals. According to a study by Julius Baer Group, China’s millionaires account for about half of the rich people across the 10 major economies in Asia and the number of millionaires there will more than double in number to 2.8 million by 2015.
What does all this mean for Australia?
Australia stands poised to capitalise on an economic transformation unparalleled in our nation’s history, with a resources and commodities boom capable of generating $480 billion of exports a year and creating 750,000 jobs in the next 20 years.
But there’s more to it that that…
Currently over 80% of our exports to China are resources; however looking forward, China offers markets of enormous proportions for all the modern services that a developed economy like Australia has to offer. We are in a prime position to supply the world’s fastest-growing major economy with food as well as a raft of products and services.
One more thing…
If we play our cards right, Australian tourism could be boosted as we become the playground of the new rich in China who will want to holiday in a nearby country, just as we were a preferred holiday destination of the Japanese in their heyday in the 1980’s.
According to the ANZ Bank, almost $2 trillion needs to be invested in the Australian economy for our nation to capitalise on the mining boom caused by the developing world’s march towards urban industrialisation.
While our new economy will be underpinned by mining, the benefits will flow through to our service, education, tourism and property markets.
Sure there will be ups and downs and lot’s of problems ahead, however we are indeed the luck country and our economy will remain the envy of the developed world.
What does all this mean for you and me as property investors?
While many factors affect a country’s property prices in the short term, in the long term they are driven by 2 main factors:
1. Population growth and
2. The wealth of the nation.
Strong population growth is a given and as I have just explained now, so is our increasing wealth.
I don’t think that anyone would argue that, as a nation, Australia will become wealthier over the next 15 years.
Australia is well positioned to benefit from the growth of Asia, which represents 50% of the world’s population. We have vast resources that will be required by our growing neighbours and we’re at the beginning of the mother of all resource booms.
Sure some companies and their shareholders will become richer, but so will the average Australian. On many accounts the average Australian is richer already than people living in most other countries, however some people living in Australia just don’t see that and complain and protest.
In conclusion:
While property prices are in a bit of a slump at present, that’s just part of the property cycle.
As the cycle moves on, and it always does, the combination of population growth and increasing wealth will underpin the strong growth of capital city property values – as they have done for decades.
So, if like me, you are confident that Australia has a prosperous future, our current softer property markets could be the ideal time to start or add to your property investment portfolio.
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