The last few days have seen a significant reaction to concerns about the short to medium term growth of the Chinese economy. Widely seen as the second largest economy in the world, behind the US, many had expected growth of recent times continue for some time to come. When it became apparent that the Chinese economy was struggling the authorities stepped in and with a historic reputation for “fixing things” this appeared to inject at least some confidence. However, it has become apparent over the last few days that the Chinese economy is in trouble and stock markets have reacted accordingly.
Safe haven investments
While the term safe haven is perhaps overused in investment markets there is no doubt that many people see property investment as a long term option. The fact is that economies will continue to grow in the longer term, although there will be short-term blips as we have seen, and demand for property will certainly grow. When you also take into account the fact that savings interest rates around the world are minimal, and indeed many savings are losing value in real terms, perhaps this will prompt yet more interest in the worldwide property market?
Why is property so popular?
As we touched on above, it is not inconceivable to create a long-term rental income stream in excess of 5%. The fact that people will always need somewhere to live adds to the attraction of property with the added bonus of potential long-term capital growth. The current situation with savings interest rates has also prompted more people to look towards alternative investments which has created significant demand in the buy to let market.
This in turn has increased demand for property in general forcing many local property markets above and beyond the affordability factor of new entrants. In what is becoming something of a vicious circle for many people, this inability to climb aboard the property ladder means many have no option but to rent which in itself places yet more pressure on property prices.
Could weakness in China prompt a worldwide economic downturn?
While there is no doubt that concerns about the short to medium term direction of the Chinese economy has spooked many investors it is unlikely to prompt a worldwide economic downturn. We may see stock market ratings adjusted, we may see short to medium term concerns and while the likes of Australia, which has a very buoyant property market, could see a reduction in short to medium term Chinese investment, life will go on.
Stock markets are historically seen to look 12 to 18 months ahead taking into account factors which we know today and extrapolating them forward. A near 15% “correction” in stock markets is concerning but this increased volatility could in fact lead to more interest in the property market. The next few weeks will be vital for the Chinese stock market, as well as the impact this will have on the worldwide scene, and it will also be interesting to see how property investors and property markets react.
Will we see a so-called flight to “safe havens” or will the demise of the Chinese economy see investors sitting on the sidelines until the dust settles?