If the Chinese economy hits the wall, Australia's housing market could be dragged down with it, the Reserve Bank warns.
The Asian giant is Australia's biggest source of foreign investment in real estate - and its share is growing, the central bank says.
That means any economic shock in China that causes appetites to wane could lead to falling home prices in Australia's two largest cities.
"A substantial reduction in Chinese demand would likely weigh most heavily on the apartment markets of inner-city Melbourne and parts of Sydney," the RBA said in its bi-annual Financial Stability Review on Friday.
Chinese buyer activity is concentrated in off-the-plan high rises in these cities, where a recent surge in supply could intensify any price falls, the central bank noted.
And although the big banks have little direct exposure to Chinese investors, the RBA said a collapse in demand could indirectly affect lenders' mortgage books.
The central bank said an appetite pullback could be driven by a hard landing for the world's second-largest economy, which would lower Chinese households' income and wealth.
"Any accompanying depreciation of the (yuan) against the Australian dollar could further reduce their capacity to invest in Australian housing," the bank added.
A downturn in China would likely have flow-on effects for other countries in the region, which could also affect broader desires for Australian property.
A further clampdown on capital controls by Chinese authorities could restrict residents from investing abroad, which may also dent Australian house prices.
Chinese demand would also be sensitive to any Australian migration or education policy changes that make it less attractive for foreigners to live or study here, the RBA said.
There are risks too for the commercial property market, where Chinese developers have become increasingly active, the bank noted.
"In the past two years, they accounted for nine per cent of purchases (greater than $5 million) compared with one per cent on average during the prior decade," the RBA said.
But AMP Capital Investors chief economist Shane Oliver doubts demand will dry up any time soon, because the Chinese economy appears to be stabilising, if not improving.
"Figures for March out today are up across the board; retail sales, industrial production, lending activity, fixed asset investment, and of course earlier in the week exports and imports and consumption," he said.
China's economy grew 6.7 per cent in the first quarter from a year earlier, providing more evidence that a slowdown may be bottoming out.
Dr Oliver said there's always the chance that Australia could fall out of favour if our currency goes through the roof, causing Chinese students to switch focus to north American universities.
"And say there's a backlash against Chinese investors in Australia, suppose a new government was elected that decided to put a ban on Chinese nationals buying property in Australia," he said.
"There are risks around all those things, but the chances are fairly low."
