Chinese property: China’s housing market is a bubble that is likely to get bigger before it pops. It may not be visible in the official real estate data, since heavy-handed government meddling to cool, then warm up the market makes year-on-year comparisons unreliable. What’s clear though is that the conditions for bubble trouble are present: money is abundant, and neither buyers nor developers are behaving rationally.
The short-term trends tell the story: the per-square-metre price of property sold rose 7 per cent in a month, from June to July, based on the latest official data. Prices rose in 63 of China’s 70 biggest cities, including export-heavy Guangzhou and Shenzhen.
By international standards, China is already expensive. When they buy, China’s urban dwellers pay three times their monthly income per square metre of housing, according to official statistics. In the UK, hardly a haven for cheap housing, that ratio is just 1.1.
Two things are pushing prices skywards. One is easy bank lending, specifically mortgages. Homebuyers can now get a 30 per cent discount on the already five-times-cut base lending rate. The share of household income going to mortgage payments has fallen by 29 per cent, Citigroup estimates — but at 34 per cent of income it still exceeds the 20 per cent paid by UK homeowners, according to official statistics.
THE other price propellant is fear: homebuyers worry inflation caused by new lending will erode the value of their savings. They see property as a haven.
Developers’ psychology may make things worse. Normally, they must shift houses to realise cash and buy new land. But when cash is in easy supply, their need to sell recedes. The big developers, many state-owned, are ploughing profits, bank loans and the proceeds of equity offerings into buying up land – at record prices. They are known locally as “land kings”. With inventories of finished houses at their lowest in months, developers may now feel able to hold back supply to increase prices further.
This happy story – for owners at least – will come to an end if liquidity slows to a trickle, as it will when bank lending slows in earnest. Both kinds of beneficiary will be hit simultaneously. Buyers will find their purchasing power greatly reduced. Developers will find that prices are falling, so they need to make more sales quickly to raise cash.
That’s likely to happen just as developers cut the ribbon on swathes of speculative new projects. Once the bubble bursts, it may be hard for Beijing to stop the pop.
