Is China’s housing market at risk of an imminent collapse?

Bloomberg News Online reported on February 05, 2014 that according to estimates gathered by Mr. Nicholas Lardy of the Peterson Institute of International Economics based in Washington D.C., there were some 66.1 percent of China’s family household assets tied to housing, making one of the largest household concentrations of wealth in real estate, and poses a risk if the world’s second-largest economy were to end up in a housing bust scenario, crimping household wealth, poverty levels skyrocketing, and potential civil unrest on the streets that might paralyse the functions of the Chinese government as it tries to manage any potential fallout coming from a possible contagion that arises from a housing collapse situation. The survey conducted by Mr. Lardy involves about 28,000 households, and data showed that mortgage debt as a percentage share of the household income rose to 30.0 percent from an earlier estimate of 18.0 percent, which could point towards risks that prices have been jacked up at an enormous pace that many buyers will just keep purchasing as other savings and investment options offer low yields and unable to derive any significant returns as much as real estate does.

Recent and historical data dating back to 2008-2009 post Global Financial Crisis (GFC) has shown an ever increasing rise in private real estate purchases, where in some cities, especially the first-tier cities including Beijing, and Shanghai saw the fastest pace of increases in values by as much as 20.0 percent. This is quite a significant and remarkable feat being achieved going into 2014, but it could also pose some risks as the majority of the Chinese household mortgage debt is tied to housing, which will lead to massive reductions in consumer spending, and bailouts that most governments, not even the Chinese government could possibly avert such a situation from arising.

In a recent academic research conducted by Mr. Gan Li, director of the Survey and Research Centre for China Household Finance in Chengdu, an institution set by the Southwestern University of Finance and Economics, it showed that household assets rose by 20.0 percent in 2011, while the value of their residential property holdings increased by 26.8 percent. The disparities in the pace of growth between household income, and their private real estate value increases have resulted in many Chinese households leveraging themselves in the hope that their private apartments or their houses could supplement their income holdings. This is termed by economists as household wealth effect as a result of a common feeling that one feels much wealthier amid the rise of their values of their real estate. However, there are others who have termed it as ‘wealth illusion’ where the rise in the values of their private real estate holdings are increasingly tying down their finances, which as a result, most of them do not derive any significant ownership rights to their private properties as these holdings are mortgaged to the bank or some financial institution.

The rise in Chinese property market has raised many concerns by Chinese policy makers as they tried to rein in on local government debt levels, reducing the pace of infrastructure growth, and clamping down on public corruption among its government officials. Several global investment banks have written research reports that cite the risks of a real estate bust in China, and its growing debt-to-GDP ratios close to 210.0 percent levels. If there were to be a housing collapse in China, the state of the world economy might also be pinned down by an immediate halt to China’s economic growth story.

According to facts obtained from interviews by Bloomberg News journalists, there is a requirement for down payments close to 30.0 percent of the property values needed before purchase, and unlike the United States, a collateralised mortgage market is almost non-existent in China, thus making loans difficult to be packaged and marketed out by financial institutions which could act as sources of liquidity, rather than running into the risk of owning a relatively illiquid asset. However, such liquidity sources could also be at risk if credit markets were to be ‘frozen’ up, and collateralised instruments such as mortgages, municipal credit, and other fixed income type instruments are not readily made available or might even face massive selloffs in order to cope with tighter credit conditions.

The housing outlook in China and its skyrocket real estate prices do pose some risks and it is unimaginable if the Chinese private property bubble might end up bursting, thus causing many household ruins. The Chinese government is closely monitoring the state of the real estate market, but there are still many reforms that need urgent attention, and the run up of home price appreciation (HPA) values have not exactly been tackled forcefully. There are risks of any delays in implementing of any tough and decisive fiscal solutions that might further jeopardise the housing market’s sustainability and resulting in a continuous slide in its economic growth projections.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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