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The Chinese property bubble: time to duck and cover?

Beijing may believe it can maintain China's housing boom, but a growing number of critics say otherwise.

The Chinese property bubble: time to duck and cover?

Beijing may believe it can maintain China's housing boom, but a growing number of critics say otherwise.

Standard & Poor’s (S&P) downgraded China’s property development sector from ‘stable’ to ‘negative’ this month. The agency warned that future downgrades could follow if government measures to release some air from the groaning, debt-fuelled, over-priced new homes business continued to effect volume.

Credible economic analysts have been predicting grave outcomes for the Chinese property market for well over a year now. Remember hedge fund hero Jim Chanos – the man who called the Enron collapse – warning of ‘Dubai times a thousand, or worse’?

But these critics have been pretty well matched by other investors and managers citing the Chinese government’s readiness to act to control house prices, and the economy’s underlying strength. So far, they have demonstrated their faith with profits.

At first, it was all about Beijing and Shanghai. According to the 2010 census, 49% of China’s massive population is now in the cities. When momentum took the market, Shanghai real estate prices rose 68% in a single year, land prices tripled.

Managing growth

The government believes that as it helped create a property bubble, on which it relied to boost flagging growth, it can now act to avoid it bursting.

In the past 18 months it has implemented safety valves: increasing bank reserve requirements; imposing taxes (including an anti-flipping sales tax on homes sold within five years of purchase); increasing minimum deposits on mortgages for second homes; restricting lending to developers; promising a giant affordable homes programme and, of course, raising interest rates.

The characteristics of a bubble are clear. Depending on which figures you believe, the cost of an average small flat in a Beijing tower block is somewhere in excess of 20 times average household salary (assuming there are two earners). The logic of the market calls for a correction.

Price war

But why has S&P decided to act now? Their analysts fear a ‘price war’ among developers. There is evidence that some house builders have been sitting on properties, deliberately holding back apartments to artificially drive up house prices. According to market researchers Dragonomics, despite a bumpy ride month-on-month, prices in China’s major cities rose 21.5% in 2010; 10% in 2009; but the April-to-April figure is 4.9%.

As the market tilts in the opposite direction, there is the risk that all these properties could fall out of the developers’ pockets and drag property prices down at an even faster rate.

Add in tighter lending controls and their effect on developers carrying unsold bricks and mortar, expectations of falling demand (the result of increased taxes and, again, tighter lending conditions), and an unwillingness among China’s cash-rich to risk their money on a falling market when there’s foreign property instead, and you have something like a perfect storm.

With China’s own urban property markets so puffed full of air, wealthy Chinese investors are asking why should they pull the trigger domestically when they can buy in, say, London, where the market’s far less volatile, and they can profit an extra 70% if the pound recovers against the dollar? Anecdotally, one agent has estimated that a third of its clients buying London new-builds are Chinese. Some 40% of foreign investment in London property in 2010 was Chinese.

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5 comments so far. Why not have your say?

Tony, Wallsend

Jun 29, 2011 at 17:41

A small flat in a Bejing tower block at twenty times in excess of household income? It makes our housing market look positively sober.

PS. Does anyone know what the price/income ratio was in Japanese housing,when it boomed some years ago.

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Anonymous 1 needed this 'off the record'

Jun 29, 2011 at 20:18

dont worry if it goes belly up england will jump in and find billions to help them out from some hidden pot after all england saves the world again.or they will be able to come to england and live. ?

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No name 2

Jun 30, 2011 at 09:21

What about Hong Kong? Is the situation similar to Shanghai or different?

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Keith Simmonds

Jul 03, 2011 at 09:25

My concern is that the Chinese Government will inevitably have to bail out the banks and that will result in large investments abroad being liquidated. American Treasuries look to be uncomfortably exposed.

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Jul 04, 2011 at 12:08

Chinese government have so many cards to play with. The property market will drop like a stone if they simply choose to release a tiny fraction of their property stock. (Civil service and the Military are still holding the prime sites plus umpty rural land)

Hong Kong is different, restricted by lack of land. There is no cure except reverse migration, which is unlikely as we know even Anthony Bolton has migrated over to that side of the globe. Price in HK will perpetually move in one direction until it is fully integrated with mainland China.

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