EconoChina

A blog on Chinese economy & society

How bubbly is the Chinese property market?

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This is the million dollar question and I’ve decided to give it a try. Where do I start? How about the developers inventory?

The National Bureau of Statistics just announced yesterday that developer’s inventory for residential housing by the end of June at 106mn sqm, or roughly 1.5mn homes assuming an average of 70 sqm (753sf) per home. This amounts to a mere 1.5 months of new home supply on last year’s sales. Now, 2009 was a brisk year. But even if I use 2008 figure, when sales dived 20% due to the financial crisis, it equates to 1.8 months of supply, far from horrendous if you consider that the US new homes supply seldom dip below 4 months even in the best of times.

Why is this focus on new homes supply important? Due to the requirement for 30% down payment for homeowners, the weakest link for a Chinese bank is actually lending to the developers, the conduit in which the bursting of a property bubble may morph into a full-fledged financial crisis.

Of course, the tightening measures on the property market only kicked in mid-April and the data is only from end of June. Given time, it’s definitely plausible that inventory may build up further and prices may plummet (so far it has barely budged). Which is why the Chinese banking regulator is performing a stress test on the assumption of 60% pricing fall in the worst case scenario. But should this be taken as an admission that Chinese property market will indeed collapse? I think not.

According to the National Bureau of Statistics, housing price index rose 14% year-on-year by June this year. Before you scream communist propaganda, I should add that this index is compiled with data from 70 Chinese cities, with huge variance among them. Beijing registered 22% rise during the period, while Sanya of Hainan (think Florida in terms of climate, location, and economy) rocketed by 59%! Private economists, like Stephen Green of Standard Chartered, have also noted the geographical concentration of the housing bubble.

So all in, I think the coming bursting, while painful, will not be catastrophic. The froth is concentrated in a few key cities and the banking system is insulated to a degree by the down payments. The US financial crisis had its root in leverage, rather than the fall of housing prices.

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Written by Cindy Luk

August 5, 2010 at 1:08 am

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