By Walter Kurtz, Sober Look
In late 2011 many were expecting China’s property bubble to burst. It looked as though housing prices had peaked and signs of stress were beginning to appear (see discussion). But the correction turned out to be quite shallow and in spite of the Chinese government’s multiple attempts to arrest housing price appreciation (and partially succeeding - see post), house prices went on rising (see figure 1).
With real rates on deposits remaining in negative territory for years, there were few places to turn for wealthy savers. Property became one of the primary vehicles to put away excess cash to escape inflationary pressures. Moreover, municipal governments made large sums of money selling land to developers, while banks (“encouraged” by municipalities) have been happily lending. And in many cases lenders and developers have set up arrangements that are a bit closer than “arms length” (see discussion). Except for ordinary families who got shut out of the housing markets, everyone benefited from this rally.
Housing investment as percentage of GDP has been growing unabated, and in recent years started approaching levels that other nations experienced at the height of their property bubbles (see figure 2).
Now, based on the house price to wage ratio compiled by the IMF, China’s large cities have the most expensive real estate in the world. Beijing is particularly expensive, as party officials deploy their “hard-earned” cash (see figure 3).
And while Western economists debate if China’s property market is truly a bubble, major Chinese developers are openly admitting it.
South China Morning Post: – China Vanke [one of the largest developers in China] chairman Wang Shi said the mainland’s property market faces the risk of a “bubble”, reiterating concerns the developer raised three months ago.
The bubble is not “light”, Wang said at a conference in Shanghai yesterday. “If the bubble lasts, it will be dangerous.”
Home prices have been increasing even as the government in March stepped up a three-year campaign to cool the market.
The measures have included raising down-payment and mortgage requirements, imposing a property tax for the first time in Shanghai and Chongqing, and enacting purchase restrictions in about 40 cities. New home prices jumped 6.9 per cent in May, the most since they reversed declines in December, SouFun Holdings, the mainland’s biggest real estate website owner, said.
But bubbles can last for a long time. Are there indications that this market may have peaked? Two key economic developments point to rising risks to this multi-year housing rally.
1. Real rates on deposits have turned positive in China recently, which will reduce incentives to use property markets as a savings tool. If rich savers make more on interest than they lose to inflation, they are less inclined to look for alternatives to bank deposits (see figure 4).
2. The recent madness in China’s money markets and PBoC’s “delayed reaction” to tight monetary conditions (see discussion) could potentially spill over into the broader credit markets, resulting in increased lending rates and tighter credit conditions in general. That’s not great news for property markets.
JPMorgan: – We expect liquidity conditions to ease in July, but in the near term, there is a risk that the tough line taken by the PBOC will create an artificial liquidity squeeze and cause an increase in the lending rate to the real sector (the SHIBOR rate also increased significantly, to 5.4%), putting further pressure on already-weak economic activity. In our view, the PBOC should reintroduce reverse-repo [injecting liquidity] operations very soon to calm the panic in the interbank market.
These threats to China’s property markets, combined with weakness in manufacturing, do not bode well for China’s near term growth prospects.
(Figure 1 - Source: JPMorgan)
(Figure 2 - Source: Credit Suisse)
(Figure 3 - Source: Credit Suisse)
(Figure 4 - Source: Credit Suisse)