China's housing market - is the bubble about to go BANG

Good analysis from SERI Quarterly. My belief is that there has been a dangerouslt large bubble for a while. The real danger is who loses from the bubble bursting - state owned enterprises, the army, government officials?

There could be blood on the carpet - literally.

The article with footnotes and more figures can be seen by clicking the link below.

Possibilities of a bubble Collapse in the Chinese Property Market [SERI Quarterly]

Japan and the US present good examples of a property market meltdown and they both exhibited common symptoms before the plunge. First, household debt was extremely high. US household debt amounted to 133 percent of disposable income in 2007 right before the crisis, while debt in Japan was 130 percent in 1990. Second, the increase in real estate prices had been running ahead of growth in disposable income from 1999 to 2006 in the US and from 1986 to 1991 in Japan. Both countries maintained low interest rates before their property bubble burst, spurring a sharp run up in home prices with deeply leveraged purchases; loan growth remained far higher than income growth for at least five years.

China's price to income ratio (PIR) is among the highest in the world, and according to some analysts, the market is frothy because housing prices are very high in terms of income levels. In fact, China's PIR is eight times on average, 19 times in Beijing and 16 times in Shanghai. This is very high compared to other countries: three to six times income in the US, 7.5 times income in Korea and 5.7 times income in Japan.

Despite such high prices, 70 percent of residents in large cities and 80 percent of those in ordinary cities have their own house. This is because many homeowners own homes provided by the government until the housing policy reform of 1998. Most significantly, China's household debt is only 39 percent of disposable income; accordingly Chinese property owners can withstand a decrease in property prices, as they are not suffering from high interest rates.7 In addition, the rate of increase in real estate prices surpassed disposable income growth only in the second half of 2009, meaning that if there is a bubble in the market, it is less than a year old.

Therefore, real estate prices are high in nominal terms, but are not in practice, an actual burden for most people. Considering the household debt ratio, the time the bubble was formed, and the rate of home ownership, if property prices slide, it is more likely to be a temporary adjustment and correction, rather than a warning sign of a coming meltdown.

Low Financial Industry Exposure to the property Market

New loans for property increased 327 percent in a year from 480 billion yuan in 2008 to 2 trillion yuan in 2009, and recorded 47 percent growth in the first half of 2010 compared to the same period of 2009. However, in 2010, the share of loans for property has remained a low 20 percent of the total, compared to 33 percent in Korea (March 2010) and 39.2 percent in the UK in 2006 (immediately before the collapse of its own housing bubble). As of the second quarter of 2010, loans for property (real estate development and mortgages) amounted to 20 percent of the total even after property prices soared from the second half of 2009.

Also, Chinese banks appear financially sound. Loans increased remarkably in 2009 as a result of government stimulus, but the loan-to-deposit ratio stood at 70 percent in April 2010, thanks to the government's 75 percent cap. Compared to bank assets, loans accounted for only a small amount,8 while property-related loans took only 10 percent of assets, enough for banks to cushion themselves from a plunge in real estate prices.9 Therefore, it is highly unlikely that a property market crash in China would trigger a series of bankruptcies among financial institutions, precipitating a financial crisis, as it did in the US and Europe in 2007 and 2008.

Long-Term Challenges of the Chinese Property Market

Chinese property issues are directly linked to government revenue. Real estate sales increasingly account for a greater share of local government revenue. Sales accounted for 23 percent in 2009.10 This has prompted many analysts to predict that the government would not control property prices, as price increases mean higher public revenue. To maintain stable financial income, reasonable growth of real estate prices would be ideal.

Meanwhile, most current homeowners benefited from the government housing policy. Today's new arrivals to cities, self-employed people, and new graduates, however, will find it hard to buy their home. Some non-owners even refer to themselves as "house slaves," working only to save enough to buy a home.

Property issues represent not only economic, but also social, class, generation, and urban-rural disparities. Although a bursting property bubble is improbable, continued price growth may spark severe economic and social problems. To prevent this, the government should maintain balance between housing price control and government revenue.

Currently, China is facing economic and social changes resulting from a transition in its growth commodel. As the property sector takes a large share in the economy, China needs to come up with solutions to prevent property prices from undermining economic and social stability, particularly in this transitional period.

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