Why you shouldn’t be too worried about China’s property bubble…yet

For some time there have been concerns that China’s property market risks becoming overheated, and is a bubble that will at some point spectacularly pop.

These fears have had less air time of late, but the column inches have started to mount up again after a top Chinese official warned that China’s property sector is ‘kidnapping’ China’s economy. Yin Zhongqing, deputy director of the finance and economic committee warned on Thursday (10 August), that ‘the real estate industry’s excessive prosperity has not only kidnapped local governments but also kidnapped financial institutions — restraining and even harming the development of the real economy, inflating asset bubbles and accumulating debt risk.’

In addition, Zhongqing starkly warned: ‘The biggest problem currently facing the country is how to reduce reliance on real estate.’

All of this brings to the fore concerns about China’s property market being a bubble ready to burst. Between 2003 and 2013, house prices in China have risen 167 percent, while in key cities such as Beijing and Shanghai, prices have increased by roughly 300 per cent. And over the past few years, prices have continued to soar again, in both high populated areas such as Beijing and Shanghai, as well as lesser known cities.

According to Moody’s Investors Service the real-estate sector now accounts for around a third of China’s GDP – up from just 10 per cent a decade ago. Therefore, a crash in property prices, it is feared, would have a major effect on the overall economy of China, and by extension both the global economy and financial markets across the globe.

The collapse of Chinese equity prices in 2015 – largely unrelated to the overall performance of the Chinese economy – was enough to cause panicked selling across global markets. However, with the China’s economy much more reliant upon property, as well as the associated build up in property related debt, the fear is that a collapse in property prices could have major repercussions for the health of the global economy.

According to Jason Hollands, managing director of Tilney Bestinvest, there would be ‘minimal direct impact from the decline in Chinese real-estate prices on UK based investors in itself, as Chinese property is largely un-investible for them.’

However, he adds: ‘Chinese economic activity has major impacts globally and is especially key in driving commodity prices as China has been a voracious consumer of raw materials.’

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Ben Yearsley, director of Shore Financial Planning, noted that if Chinese property were to fall substantially, the knock-on effect of bad debts in the banking system would be huge and would no doubt lead to a large fall in the stock market, which would be felt across Asia. He adds: ‘Don't forget China has effectively saved the global economy twice in the last decade with huge monetary stimulus. So, if the Chinese economy stalled, the effects would be felt globally.’

Reasons not to fear a crash

But, at the same time, there is good reason for investors not to fear a crash in the Chinese property market and any fallout for the global economy any time soon.

First of all, Chinese authorities have taken measures lately to try and stem demand. Cities across China have implemented more stringent mortgage lending requirements, upping the amount of down payment required and placed tougher restrictions on multiple home ownership. In Beijing, first-time buyers are now being targeted, with such buyers facing interest rate increases. While some of these new regulations have pushed demand out to smaller, non-tier 1 cities, there is evidence that Chinese property is starting to cool off in its major property hotspots.

Recent data shows that nationally, house price growth has dampened. Small cities still saw rapid growth, but China’s major population centres saw a cooling off. Home prices in Beijing fell in June while price growth stalled in both Shanghai and Shenzhen. The figures suggest more of a soft landing than a crash.

The prospects of a hard landing for Chinese property prices in 2017 seem unlikely due to internal conditions in the country. This is a particularly sensitive year for the Chinese Communist Party, with the party holding its 19th Congress in autumn. The Congress will be decisive for President Xi Jinping in his efforts to shore up power, meaning authorities will do all they can to prevent instability in the Chinese economy. China, which still resembles a command economy in many ways, has a lot of resources at its disposal to maintain economic and social stability.

None of this is to say that house price growth in China is sustainable in the long-term. If the recent dampening of prices in major cities turns out to be a blip, and prices continue to soar, prices will eventually have to correct themselves. The fear, in this case, is knock on effect to Chinese debt, which is a growing concern to both China’s and the global economy. However, points out Adrian Lowcock, investment director at Architas, such risk is more long-term and shouldn’t necessarily be on the immediate radar of UK investors.

Even so, if China did face a major property crash in the short-term, says Lowcock, its impact on the global economy and markets may be more muted than often expected. While economic growth has been dependent on the fortunes of China in recent years, other centres of the world economy are once again returning to health. The US has returned to stable economic growth, while Europe is finally, after years of crisis, out of the woods.

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That’s not to say China doesn’t pose any risk. With stock valuations already at record highs, it won’t take much to start a sell-off. ‘Market sell offs can come around for reasons for known and unknown,’ says Lowcock. And sometimes, they can ‘come just come from sentiment.’ Whatever happens with Chinese property, given current stock market valuations, says Lowcock, investors should be hedge their bets and spread their bets far and wide by investing in a variety of different asset classes and sectors. 

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