Bubble trouble in China
Soaring home prices and a glut in the residential property sector threatens the world’s second biggest economy
That goes up has a nasty habit of going down with horrific economic consequences. In China, home owners have reportedly staged protests in parts of the country amid a slump in nationwide prices.
Property developers are now selling homes for up to 20 per cent lower than the current owners paid for them just months earlier.
For nearly 15 years, property prices in China have been on a seemingly endless long march to – in some parts of the country – stratospheric levels that rival those in downtown New York and London.
But the question now on everybody’s lips is whether the party is over for the foreseeable future, and whether China is set for a slow, steady decline in prices and demand, or a potentially catastrophic implosion in what is possibly the world’s biggest property bubble.
Such concerns surfaced as the IMF raised the alarm earlier this month, warning that swathes of the advanced world face a problem with soaring home prices. Canada alone, for example, has housing prices 33 per cent higher than long-term averages compared to personal incomes.
“House prices are inching up,” wrote Min Zhu, the IMF deputy managing director, in the official IMF blog. “But is this a cause for much cheer? Or are we watching the same movie again? Recall how after a decade-long boom, house prices started to fall in 2006, first in the United States and then elsewhere, contributing to the 2008-9 global financial crisis.”
But to return to China, and Pan Shiyi, the property mogul and chief executive of Soho China, recently compared the country’s property market to the Titanic at an investment meeting in Shanghai.
Pan is no lone Cassandra. He is just one of many analysts and property magnates, both in the world’s second biggest economy and abroad, who believe China has reached a dangerous tipping point. And the consequences could extend beyond the property sector itself. “After hitting the iceberg, the risks will not only be in the real estate sector,” Pan said at the Shanghai meeting. “The bigger risk will be in the financial sector.”
Writing in The Financial Times on May 12, George Magnus, the former chief economist and now independent economic adviser to UBS, warned that even though dire predictions about a bust in the Chinese property market had failed to substantively materialise, this “is the time for the world to pay attention”.
“The default risks in the weakly regulated shadow-banking sector – and the rapid rise in local government debt – are real and property-related,” he said.
Like other respected analysts, Magnus also pointed out that China’s property sector now accounts for 13 to 16 per cent (depending on who’s counting) of GDP. This is more than double the US’s share at the height of subprime bubble in 2007.
Of course, none of this is a secret. But the reason this time might be different, Magnus and many others argue, is that the issue of oversupply in the property sector has become too obvious to ignore. According to a recent Nomura report, last year alone, about 34.4 square metres of residential housing space was created for each urban Chinese. That is half of the country’s estimated 1.35 billion-strong population. The rub is that so much of China’s attempts to shift from its former reliance on exports – in a global deflationary environment of diminished demand – has been built on ever-rising property values.
They have famously thrown cash at local-government boondoggles, such as ghost towns and roads to nowhere, and countless deserted industrial parks, while also financing a tsunami of Chinese tourism and international investment.
The implications of a Chinese property crash will inevitably be global, but they will be much more serious for the Chinese Communist Party. It is faced with a delicate balancing act of not allowing property to go too far into negative territory and alienating the middle classes.
Beijing must also supply low-cost housing for the vast majority of its population that have not materially benefited from the “China economic miracle”. The key question that remains is whether another miracle is the best that China’s government can hope for.