Nov 21, 2014
After years of soaring prices and frantic construction across the entire country, the growth of China’s real estate bubble has finally faltered. Barely fifteen years old, the country’s property market is showing serious signs of strain.
A Train Wreck Waiting to Happen
At less than two decades old, China’s property market, despite the recent global economic crisis, has never experienced a real crash.
Until the late 1990s, the country’s urban residents largely lived in ‘work units’ provided by the country’s post-Communist government. Until 1994, the national language had no word for ‘mortgage’, and it was not until 1997 that China’s banks began to issue home loans.
Economists first began to warn of an emerging property bubble in 2008, prior to the global financial crisis. Eager to prevent such an occurrence, the government introduced purchasing and down payment restrictions to slow soaring prices.
When the economic crisis hit, however, the country’s economy began to freefall, and Beijing responded to the event with a fresh tidal wave of credit. The property bubble ballooned.
The result was an immediate rebound. China’s total debt rose from around 140 per cent of gross domestic product at the end of 2008, to more than 250 per cent at the end of June.
Soaring Prices and Falling Demand
From 2008 onwards, land prices soared, increasing fivefold. The rest of the economy followed suit. The used car market, for example, is one of the most expensive in the world, restricting average vehicles to all but China’s super rich. The increase in land prices triggered such corresponding asset price rises across the economy.
The country’s one saving grace was that, even as prices soared and supply mushroomed, the demand for housing and office space remained high – until this year. In June 2014, prices in 55 of China’s 70 largest cities fell, an increase on May’s figures, which saw prices drop in 35 cities. This marked a significant acceleration in the downward trend that had started at the beginning of the year, and marked the sharpest monthly price decline since December 2008.
According to Zhu Haibin, an economist, “A housing market slowdown is the major near-term macro risk in China.”
So what triggered this change in the market? Put simply, China has built too much. Up to 2011, the market frequently suffered from supply shortages. Today, however, total floor space under construction is enough to satisfy well over four years of demand at national level. In the worst affected provinces, there is enough property available to supply buyers for more than seven years.
According to Gan Li, director of the Survey and Research Centre of China Household Finance, over 90 per cent of the country’s households already own at least one home, with, on average, nearly 76 per cent of their assets tied up in real estate, limiting the ability of most homeowners to increase this number.
However, despite this inability to buy, it is estimated that China’s housing stock, already more than sufficient for every household to own their own home, is increasing by over 15 million new units every year. With a target market with no capital to invest, where can this surplus of properties go and, more importantly, how catastrophic an impact will this overzealous supply have on the country’s already failing property market?