The - freely adapted - Christian Bible (Matthew 7:24) says if you want your house to stand up in a rain storm/flood then build it on rock. This is what the wise man did. The foolish man, however, built his house upon the sand. “The rains came down and the floods came up and the foolish man’s house went splat”.
Equally divergent are the opinions in China as to how solid the housing market is, given the deluge of Government controls and wave of inflation. In the latest price data, however, there was succour for both. In May, for example, the price of new homes rose by an annualised 4.2%, which was down from April’s 4.5%. Similarly, month on month, May’s rise was 0.2% versus 0.3% in April. In terms of existing homes, May was pretty much flat at 3.2%, year on year, with no real change in the month.
The (beach) bears says that this is the beginning of the end while the (boulder) bulls welcomed the news, which they said underlined both the success of Government policies and the substance of demand. In terms of the latter, new prices rose in 67 of the 70 cities monitored by the Government (66 for existing). Similarly, in a number of less mainstream locations new prices rose by 7% or more and in existing ones by double digits.
The very wise man, Stephen Roach, Chairman of Morgan Stanley believes that the bears are wrong and that bubble fears are overblown as incomes rise and the largest urbanisation in history continues. “I can’t say a bubble will never happen”. But “the important signal Chinese authorities have sent is that unlike their counterparts in the West, they are focused on relieving or deflating bubbles before they become a major problem”.
Similarly, “the dynamics of prices this year will be much less aggressive than in the past” said Natixis. “If you look at the transaction volumes, the policies are working”. The investment bank also said it is significant that the Chinese government did not did not impose a nationwide flat property tax (to date it has been levied only in Shanghai and Chongqing).
“Underlying demand from the end users is still very much here” said JLL. “There’s no bubble from that perspective”. Nor are Chinese families saddled with big mortgages as domestic buyers have to pay at least a 30% down payment for the first home they buy and 60% for second homes, compared with as low as a zero down payment in the US and UK ahead of its financial crisis. “The western concept of bubble with tremendous level of leverage on home buyers clearly is not the case in China”.
Stephen Roach again. Too much is being made of the so-called Chinese property bubble as China’s urbanisation fuels demand for housing, he said. “China often puts new office and residential supply online before demand. Over the next 20 years, some 360 million people will move from the countryside to cities in China and that provides a powerful source of demand to absorb the supply that’s now being put in place”. Some 170 million people moved to cities in the last 10 years, the biggest urbanisation in history, according to the Chinese Academy of Social Sciences. What is more, the Chinese Government aims to increase the proportion of those living in cities from 47.5 to 51.5% by 2015, according to its latest five year plan; and this would be the first time that those living in the city outnumbered rural dwellers.
But, the process needs to be handled with care. Property accounts for some 10% of GDP and it is a key pillar of the economy. “The Chinese government is facing a dilemma on the one hand to control inflation while on the other hand not wanting the property market to crash” said Patrick Chovanec of Tsinghua University.
Also pragmatic is Citicorp which says that China’s investment in residential property accounted for 6.1% of GDP last year, the same as the record level in the US in 2005 preceding the sub-prime crisis. it also says that The Government is prepared to sacrifice 1.0 to 1.5 percentage points of GDP growth to restrain the property market. “China’s quest to curb property prices is one of the important parts to its fight against inflation. If home transactions slow, property-related consumption and investment might also slow, and take the overall economy with it”.
Nonetheless, Citigroup also adds that the dramatic rise in home prices should be “no surprise” given China’s 30 years of averaging 10% economic growth. “China’s rising home prices are strongly linked with the Country’s economy, which is a process of wealth accumulation”. Similarly, urban household income per capita rose 13.7% in 2010 from 2009; and there is great desire in China to be an owner occupier.
Foreign capital also continues to flow into the Chinese property market despite divergent opinions of which direction it is going. And, in the first five months of the year it surged by an annualised 57.3% to Yuan 26.6 billion. In addition, Singapore’s CapitaLand - which is also South East Asia’s largest developer - says it is aiming to double it portfolio in China over the next five years; and already has $8.1 billion invested.
My final layer comes from the Shanghai stock market where the sub-index of property developers with the Composite is now 7.5% up year-to-date in a stock market off by some 2.3%.
“The loftier the building, the deeper must the foundation be laid” - Thomas Kempis
HEADLINES
• Foreign capital continues to flow into Chinese property
• Chinese banks told to cut loans to property developers, according to Chinese press reports
• Local governments will be allowed to issue bonds to finance construction of affordable housing
• China new home prices rise by an annual average 4.2% in May, with gains in 67 out of 70 cities; existing homes rise by 3.2% (and all but four were higher)
• Government controls on housing market are beginning to have the desired effect; but, happily, in a pretty measured reality; and
• Down payments on houses may rise; for first homes from 30 to 40%
• PBOC poll shows that three-quarters of respondents think house prices are unacceptably high
• Singapore-based CapitaLand aims to double its China portfolio over five years on economic expansion
• Shanghai bar district is to be replicated in Shui On
• Beijing to re-offer nine lots in CBD on 6 July; in a year in which land sales have fallen in value by 75%
• Hong Kong home prices to fall by as much as 15% be year-end, says Walter Kwok
• Cheung Kong’s Chiu says he is “not that bullish” on Asia’s housing market: with Government measures making an impact in China; and in Hong Kong, a flatter outlook
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