China’s real estate market

May 25th, 2016 | By FCT

Are regulations cooling things off or merely inflating another bubble?

The sheer size of China’s population trumps imagining: with nearly 1.4 billion people living within its borders, China has more people speaking English than the English-speaking populations of the United States and Canada combined (quoted by former US ambassador to China, Jon Huntsman).

China’s real estate marketplace is equally immense—and, many analysts contend, as fragile as it is vast.

Why should we care? Because if the Chinese real estate market implodes, then China’s economy may subside as well. What’s underpinning this fragility?

People: people moving.

Some 220 million Chinese have moved from rural towns and villages to one of China’s metropolitan areas, where, as unskilled labour, many work building “ghost cities”: square miles of highrise apartments with no residents. These “ghost cities” aren’t owned by the government: they’re owned by investment syndicates; should the market collapse, the evaporation of wealth would be unprecedented, with global implications.

Regulatory changes in 2013 were designed to cool off a white-hot market and for the most part, most China property market-watchers agree: the regulatory changes worked. The market consolidated, then took off again, growing by an eye-watering 14.4% in 2014, fuelled by investors departing China’s cratering equities marketplace.

There’s more: for years, China’s sky-high savings rate—over 60% for most Chinese; there’s no state pension scheme in China—has been the bedrock for the property market’s fluctuations. That and minimal Chinese household debt ratios have provided a measure of cushioning from the wildest market movements, but the huge residential inventory overhang looks to be catching up with China’s spectacular appetite for housing investment.

The subtle thing is that China’s urban market is differentiating—and that differentiation is accelerating, as first-tier, technology-driven megacities (Shenzhen, Shanghai, Beijing, with populations over 10 million) outpace smaller, more traditional urban economies (Chonqqing, Tianjin, populations 5-10 million).

Tech capital Guangdong province is catalyzing real productivity gains and job creation, inciting population inflows; that, in turn, contributed to Shenzhen’s 52 % property price gains over the past year. It’s Silicon Valley all over again, only bigger.

“China’s 60 richest cities—many of which have double-digit real estate appreciation annually—produce $8.6 trillion in economic value (half the size of the US GDP),” notes China real estate analyst Dan Steinbock “include all of the world’s 10 fastest-growing cities and represent 15% of all global growth.”

There’s a catch, of course: the very policies designed to decrease the wild market conditions of China’s overbuilt smaller cities and housing-starved megacities are just as likely to inflate yet another bubble.

With 30% down financed by easy down payment loans and 24% interest, China’s real estate market is playing with matches, with a burgeoning (and highly illegal) secondary market for down payment loans threatening to catch fire in Shenzhen and Beijing. Mobile and online platforms aren’t helping matters, adding even more modes of leverage to already over-leveraged markets. Expect to see another wave of government regulations in short order. Make no mistake, however: China’s real estate market has cracks all over it.

Do you think this bubble is ready to burst? Comment below.

Further reading:
Shanghai to monitor mortgage lending more closely: document
China’s Shenzhen raises property deposit thresholds
Why China’s Property Rally Has ‘Reached A Tipping Point’