Picture: Getty Images

It’s little wonder that many are warning about a potential correction, or worse, in apartment prices in Australia’s eastern capitals right now.

There’s a lot being built, going up faster than at any point in the past, fueled by record-low interest rates, strong price growth, renewed investor activity and an influx of foreign buyers.

All one has to do is look skywards in Sydney, Melbourne and Brisbane to get a sense of just how big in scale the high-rise building boom is.

With so much stock hitting the market, at a time when Australian population growth is slower than what it’s been in much of the past decade, simple supply and demand alone suggests there’s some risks to where prices will head next.

Throw in the potential for changes towards the tax treatment of housing, higher interest rates and the increased likelihood of tighter macroprudential measures being introduced to slow investor activity, and those risks, seemingly, are amplified.

And they’re not the only ones.

Chinese authorities are cracking down capital outflows leaving the country, including those being funneled to Australia to pay for property investment.

“The updated FX rules stress that people cannot purchase FX for overseas investment, including buying houses, securities or investment type insurance,” said Wei Li, China and Asia economist at the Commonwealth Bank, following the implementation of the tighter restrictions announced by China’s State Administration of Foreign Exchange (SAFE) at the start of this year.

And it appears those restrictions, along with tighter lending criteria from Chinese financial institutions for property investment overseas, may already be having an impact in Australia.

According to a report in The Australian, citing an industry expert, almost 80% of Chinese buyers can’t settle on the Australian apartments they have bought off the plan and wish they could walk away from the contracts.

“The off-the-plan apartments market is now the worst I have seen in the last 10 years,” sai Li Ming, the co-director of Melbourne-based real estate company Aussiehome.

“Chinese buyers are still active in the established property market, but they would like to extend the settlement periods in their contracts out to as far as 12 months, betting on changes within China that might lead to a loosening of lending policies and of the barriers to taking money out,” he said.

While only one view on the current state of the market, it’s certainly something to watch, particularly with so many developments currently under construction and nearing settlement.

It’s a risk that’s been on the radar of several prominent Australian economists in recent months too, even before the crackdown on Chinese capital outflows was announced.

“Huge uncertainty prevails in this market,” said Bill Evans, chief economist at Westpac, in relation to what he was witnessing in some new apartment markets in September last year.

“A significant proportion of the buyers are offshore based, so-called FIRB buyers,” he said, adding that many were Chinese citizens.

Source: NAB

Even before the latest restrictions were announced by SAFE, he warned that Chinese policymakers’ attempts to stymie capital outflows only heighten risks for apartment prices and settlement on newly constructed apartments.

“At some point, the Chinese authorities, who appear to have stabilised last year’s spectacular near $US1 trillion loss in foreign reserves, may decide to slow this leakage,” he said.

“Certainly we have seen marked evidence of a tightening of capital controls, particularly for the non-corporate sector. That tightening of capital controls might also impact the construction boom.”

Evans was on the money in relation to capital outflows; the question now is whether he’ll be correct that it may lead to problems for developers and established apartment owners.

And he’s not alone in expressing caution towards the outlook.

In a research note released in early September 2016, Ivan Colhoun, chief markets economist at the National Australia Bank, said that the presence of a large numbers of foreign investors complicated not only the outlook for prices but also settlement risks.

“Recent trends and reports suggest there has been a modest increase in delays in settlement rather than outright non-settlement. And it is typically foreign buyers that are now finding it somewhat harder to access finance and/or expatriate finance, the latter largely from China,” he wrote.

According to data released by the NAB earlier this year, foreign buyers accounted for 10.9% of all new property purchases in Australia in the final quarter of 2016, recovering after a slowdown earlier in the year.

The bank said that foreign buyers were noticeably more prevalent in Victoria where their market share of sales rose to 19.3%, up from 15% in September quarter.

Elsewhere, 9.3% of new properties sold in Western Australia went to foreign investors, marginally ahead of Queensland at 9.2%.

In New South Wales, Australia’s most expensive housing market, only 8.1% of new properties were sold to foreigners during the quarter, up fractionally on the previous quarter’s 8.0%, but well below the 20%-plus levels seen in early 2015.

It’s clear that there’s a lot of foreign involvement in the market, underscoring why some are concerned about what may occur should the finance to fund these purchases dry up.

You can read more at The Australian here.

Business Insider Emails & Alerts Site highlights each day to your inbox. Email Address Join

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.