Bust may be looming over China property market

Bust may be looming over China property market
Monday, June 2, 2014
By Kelly Olsen, AFP

BEIJING–After years of boom that have seen prices rocket, the prospect of a bust is looming over China’s vast property sector, with authorities hoping to avoid a meltdown that could send shock waves through the world’s second-biggest economy.

Housing was doled out by the state when Communist-style collectivism dominated economic management. But in the past two decades that has given way to market-oriented principles as China’s economy has opened.

New home prices have soared, more than quadrupling in Beijing and Shanghai since 2003, and more than doubling in the country as a whole, according to a report by Jeremy Stevens, Beijing-based Asia economist at South Africa’s Standard Bank.

The increases have been a key source of wealth for China’s rising middle classes, and a major driver of the economy.

Now some — including individuals who have made fortunes — foresee imminent disaster.

“I think Chinese property is the Titanic about to crash into the iceberg right in front of it,” Pan Shiyi, billionaire chairman of commercial developer SOHO China, said at a forum, China Business News reported last week.

At the same time, surging prices have driven homes beyond the reach of many ordinary Chinese, stoking resentment and inequality.

The People’s Bank of China, the central bank, last month asked domestic lenders to give first-time home buyers priority in mortgage lending, which analysts saw as aimed at boosting home purchases amid oversupply.

Observers and analysts concur that problems are rife and cannot be ignored by authorities, lest economic growth take a hit.

“Real estate is nearly 20 percent of GDP (gross domestic product) in China so if that sector has a problem you definitely have a problem,” Joerg Wuttke, president of the European Union Chamber of Commerce in China, told AFP.

“Definitely a real estate bubble bursting is bad news.”

Negative Outlook

Home prices in major Chinese cities posted their first monthly decline in nearly two years in May, an independent survey showed Saturday, providing new evidence the once red-hot market is losing steam.

The average price of a new home in 100 major cities declined by 0.32 percent from April to 10,978 yuan (US$1,758) per square meter, according to the China Index Academy (CIA), the first fall since June 2012.

Year on year, new home cost growth slowed for a fifth straight month, rising 7.84 percent, though prices fell in 31 of the 100 cities.

The results mask huge variety, however, as some of the country’s largest cities are still maintaining double-digit gains. Beijing prices rose 22.39 percent year-on-year in May.

Barclays economist Chang Jian said in a report that “the risks of a disorderly adjustment are real and rising,” given factors including expectations of falling prices, financial trouble among developers, heavily indebted local governments and a weak financial system.

Moody’s Investors Service downgraded its outlook for Chinese property to “negative” from “stable,” citing an expected “significant slowdown” in residential property sales growth, high inventories and weaker liquidity over the next year, along with lower expectations for the economy.

Ghost Cities

There is so far little concern a domestic real-estate meltdown could trigger panic in the broader global economy and banking system such as during the sub-prime crisis in the United States, as China’s heavily regulated financial system and property market remain relatively isolated.

The housing trouble, however, comes at a sensitive time as China’s leaders want to shift the country’s growth model to one where private spending, rather than public-sponsored investment, drives expansion.

Wang Tao, a Hong Kong-based economist at UBS, said the government “still has many levers to pull to stabilize construction and support economic growth.”

“We do not expect a sudden collapse of property prices or a financial or balance-of-payment crisis, as seen often in emerging economies,” she wrote in a report.

But the consequences of a property bust could still be painful.

Standard Bank’s Stevens said that over the last three years the vast majority of China’s middle class wealth increase has come from their home values, meaning they are now “more vulnerable to a price correction.”

China’s government has been trying to contain property values through measures such as restrictions on purchases of second and third homes, higher minimum down-payments and taxes in some cities on multiple and non-locally owned homes.

But it is a fine line to tread, as local authorities make much of their income from land sales to developers, so curbing property development can slow economic growth in China’s regions.

The downside to unhindered development can be seen in China’s so-called ghost cities, urban areas scattered throughout the country and characterized by new and largely empty apartment blocks.

“Unfortunately, housing is one of the few sectors that the Chinese government has not mastered its control over,” Societe Generale economist Yao Wei said in a report.

“Adding everything together, the aggregate exposure of China’s financial system to the property market is likely to be as much as 80 percent of GDP,” she added.

“This is not a sector that can go terribly wrong if China wants to avoid a hard landing.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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