China’s property situation – Yes; but

 In trying to grasp China’s financial potential, its property market is often put under the microscope. The consequences of the housing bubble in 2007 are still bitter for most. Is China heading for a bust worse then Dubai’s?

Greedy foreign investors, local bankers, and developers are partly to blame, along with local governments. First, western funds support local firms to build developments in order to reap a short term profit. Secondly, local bankers close their eyes on their client’s disposable income to grow their own loan books. Thirdly, developers are carelessly involved in speculation; one will acquire land with a 10% down payment, using that as collateral to purchase more land worth half of the first total land value. So far the assumption that the land can be sold making a profit when low on liquidity has been correct – this deliberate belief however, will not hold if the market were to turn down. Finally, land sales are a significant portion of the revenue of local governments; therefore accepting a 10% down payment is considered good enough.

In an attempt to avoid a property disaster, Beijing has put in place new laws to tame the wild frenzy. Concerning speculative activity, the following have been implemented; a restriction on mortgage(s) for investment purposes, a ban on state owned enterprises buying land, and pressure on developers to build and release properties quickly.

The government has also increased the interest rate to induce people to keep money in the banks,  raised the minimum down payment for first time buyers to 30% of the home value (up from 20% in 2009), added limitations on third time buyers to access mortgages, and applied a new property tax in Shanghai and in Chongqing.

Time will tell the effectiveness of Beijing’s measures. Nonetheless, in two critical respects, China’s future cannot be compared to Dubai’s past: First, China’s massive scale urbanization and income growth is the result of the underlying demand for fast property development; the Dubai model was “build it and they will come”. Secondly, leverage is not there; loans to developers and mortgages account for only 20% of outstanding loans in 2009, compared to 57% in America.

We saw in 2007, a housing bubble caused a debt crisis – the debt in China is still too low to cause a crisis; but it should be watched closely.