by David Thorpe
May 2010
Yet another home-buying scheme has introduced a form of property ownership under which individuals and the government can buy homes together and share ownership according to the percentage of their payments. Such homes are targeted at low-income households and usually priced lower. Individuals should pay off the government’s part within eight years, with the first five years interest-free. Wow! That should help kick start the UK housing recovery shouldn’t it? Well actually no it won’t because this is just one of many new schemes to be launched this year in China. So what is it with China that should make us all sit up and take notice? Well quite a lot actually. The sheer scale and size of what is happening in China is simply breathtaking. There are a lot of clichés about it in terms of size and its 1.3 billion consumer market. But how about this one, just last year, a record $560 billion of residential property was sold in China, an increase of 80 percent from the year before!
I suppose there has to be a good reason why anybody starts paying attention to what is really happening in China. I joined the party pretty late myself. We opened a new office in Beijing in 2005 and I was due to visit and meet with our managing director for South East Asia. He suggested that before I came that I read a book called Mr China written by British-born Tim Clissold. The book provides a hilarious true account of how a bunch of Wall Street bankers set about investing half a billion dollars in the burgeoning China of the 1990’s and then watching all their investments literally disappear in front of their eyes . The book serves as a reminder that you really need to know what you are doing when entering new markets and to be cautious otherwise you will get more than just your fingers burnt. Given that I work in an industry that sets out to protect mortgage lender’s interests in real estate this sounded like pretty scary stuff. Since that first visit, I have watched with fascination the dramatic growth in the Chinese real estate market. According to new research, average home prices in Shanghai shot up 68 percent last year, while Beijing leapt 66 percent and Shenzhen, 51 percent. This sort of news is immediately followed by a chorus of “bubble” warnings with one commentator recently describing it as “the greatest bubble in history”. In fact so much has been written about the perilous state of the Chinese economy that you could easily be forgiven for thinking that it is on the verge of meltdown. Maybe it is. There is however many other voices (and not just the official ones) that believe people are getting too carried away with the bad news stories and should start looking for the good ones. Home prices overall (not those in the hot-spots) are rising less quickly than incomes which means housing is becoming more, not less, affordable: the opposite of what happens in a bubble. There are many other economic indicators including the less than spectacular performance of the Shanghai Composite Index and the modest increases in inflation that make it hard to conclude that the economy is any less stable or more stable than it has been for the past ten years.
This leads me to two really important questions the first being how did the global financial crisis affect the Chinese real estate market? The second question being, is there any danger that a slowing of their economic growth will leads to foreclosure on a large scale? In answer to the first question, there was undoubtedly a period of time when there was a real impact as people and companies postponed big purchasing decisions either because they were nervous or because they were short of cash or credit. It was hoped that China would help to lead the global recovery and in many respects they have. The initial slump experienced in some of China’s property hot-spots has been replaced with a surge in activity as evidenced by last year’s figures. For example, China added nearly two million square metres of new apartment space every day last year, 20 percent more than in 2008. Hard to really say what sort of impact the global financial crisis had on their real estate market with growth like that. Maybe it would have been a 40 percent increase?
As to whether we could see a surge in foreclosures the answer is even more unclear. There are certainly local pockets of severe property market overheating, with state-owned enterprises with deep pockets after last year’s banking binge, paying over-inflated prices at local government land auctions. There is also no doubt that these sorts of excesses will eventually lead to problems down the road. The authorities have picked up on this sort of behaviour and have recently moved to rein in the easy credit that helped finance China’s hyper-development, including making it difficult for home buyers to take out a second mortgage. Inevitably foreclosures will follow but on what sort of scale, it remains to be seen.
One other thing worth noting is that when other recent booms collapsed – in the United States and the UK, for instance, they depressed entire economies. In China’s case, a bursting bubble could affect much of the world. China is the fastest-growing large economy and, so far, a main engine pulling the world out of recession. If it stumbles or worse collapses, we will all feel its effects.