Australia could be hit by Chinese property bubble Labourers at a residential construction site in Shanghai this July as fears of a Chinese property bubble grew. Bubbles in the Chinese property market are a bigger risk to Australia's economy than investor speculation in Sydney and Melbourne, say bankers and ratings agencies. Paul Gruenwald, Standard & Poor's, chief economist for the Asia Pacific, said in terms of price spikes in property values Australia is "smack in the middle of the pack" compared to other countries in the Asian region. "On balance I get far more queries about China than Australia," he said. He agreed there is potential for a correction in prices in Australia, but as a risk he said the domestic market didn't stand out. Less so than other countries in Asia, Australia has not imported US-style ultra low interest rates. However, if there is a price drop in China, Australia would be next in line after Hong Kong to feel the impact if this then led to a downturn in the Chinese economy. "The risk is the intersection of a non-bank credit boom going into housing," he said. We now have prices falling in 69 of 70 cities across China. Everything is softening. He said their "base case" is that China can "muddle through" with direct intervention from the government, but if there is a significant property price fall and this shocks the rest of the economy, Australia is in the firing line. The No 1 exposed economy is HK, but Australis is right after that. Aust is the most geared into the China investment story," he told the Australian Securitisation Forum conference in Sydney on Tuesday. Bankers expect the Reserve Bank and APRA to announce after the financial system inquiry hands down its final report later in November whether it will introduce targeted measures to make investing in property less attractive for investors. Almost half of all new residential lending in the past 12 months has gone to investors. In Sydney the figure is 60 per cent. But banks argue the risks now are less than in previous cycles of home price rises. Ken Hanton, director of asset transformation at NAB, agreed with Mr Gruenwahld that China is "one of the [potential] shocks and real risks we face." He said Australia had had several cycles of house price growth and fall in the past decade, with some much stronger than the present rises in Sydney and Melbourne, but in each case there was a no ensuing plummet. Over the last 10 years we had national house price growth capping out and then falling. In 2007 to 2009 it capped out at just under 15 per cent growth," he said. Subsequent falls saw growth rates fall to minus 5 per cent. This time around house price growth has slowed and it looks like it has capped at 11 per cent. For there to be a housing price bubble now about to pop, then there must have been several in the past decade, he said. Other bankers and analysts said the definition of a bubble in prices requires three conditions: high credit growth, reductions in lending standards and expectations of continuing property price rises. Tally Dewan, a securitisation analyst at Commonwealth Bank, said it is hard to know whether people think prices will keep rising, but the proportion of high loan to valuation ratios had in fact been falling, suggesting lending standards are not reducing. Lending growth has been relatively low because many borrowers had chosen not to lower their repayments even though interest rates had reduced. This means many are well ahead on their loans. ANZ Bank senior economist, Felicity Emmett, said lending growth is now at about 8 per cent per annum. She pointed out it had been about 20 per cent in 2003 and growth in loans to investors was at about 30 per cent then.