Is China's Housing Bubble About to Burst?
Lost in the storm around Greece's debt problems, have been reports out of China indicating a slowdown in that country's real estate market.
“As investors focus on Greece, there may be another story just as dangerous taking shape in Asia,” said Nick Chamie, global head of emerging markets research at RBC Capital Markets. “Anecdotal data suggests a correction in Chinese commercial and residential property markets may have already started or it could materialize in the coming months.”
Local media have reported a significant decline in real estate transactions and prices in major markets including Beijing, Shenzen, Shanghai and Guangzhou in recent weeks.
Average daily transactions of apartments in Beijing dropped by 96 percent year-over-year during the three-day May Day holiday—traditionally a busy season for home sales.
And homes yet to be constructed fell 35 percent year-over-year, according to Beijing Real Estate Transaction. Compared with the month before, the decline of homes to be constructed exceeded 80 percent.
If the anecdotal evidence is confirmed by official data in the coming weeks, said Chamie, China’s overheating property market could indeed be seeing a real correction. A spillover of a possible slowdown in China’s housing market into commodities and financial markets should not be underestimated, he said.
“It could have a major negative impact on global markets and especially emerging markets,” Chamie went on to say. “China is essential to much of the optimism that has been rebuilt in the emerging markets.”
This comes at a time when the Chinese stock market is down 25 percent from its peak last August, said Marc Faber of "The Gloom, Boom & Doom Report" on CNBC on Friday.
“A slowdown in the Chinese economy is coming regardless,” Faber said. “We have a bubble in the property market—not in every city to the same extent. That bubble will have to be deflated at some point.”
Meanwhile, Beijing policy makers have already taken aggressive steps to curb the surge in transactions and prices in recent weeks. The government has raised down-payment and deposit rates for second homes from 40 to 50 percent, restricted mortgage lending to those buying a third or more apartments, and tightened developers’ access to bank credit, among other measures.
But fluctuations in housing prices in China are not out of the norm, said Nicholas Consonery, a China analyst at the Eurasia Group. Beijing has played an aggressive role in the country's realty market for some time.
In late 2007, for instance, the government’s tightening of monetary policy dampened housing prices. And in 2008, the country’s massive $586 billion stimulus and eased lending drove prices back up.
“From a policy perspective, it’s just not unexpected that you get a correction,” said Consonery. “You basically have a market that is extremely susceptible to policy risk. Since they liberalized the market in the ‘90s they’ve go this boom and bust cycle. The government basically drives outcomes in the sector.”