The Chinese authorities have yet again clamped down on property market investment amid concerns that the sector is headed for a price bubble. While in normal circumstances you would suggest that the authorities are reacting correctly to a hot market, the situation in China is very different. This move by the Chinese authorities led to a 1.3% fall in the Hang Seng share index and could have further repercussions going forward.
Mixed signals
Those who follow the Chinese real estate market will be well aware that only a few months ago the market was in freefall, property companies were struggling to pay their debts and the authorities were forced to step in to buy up unsold properties. Many of these properties were then sold “on the cheap” to first-time buyers as a means of massaging sales figures and demand for property. However, the situation seems to have changed over the last few weeks and now the authorities believe the market is “hot” and needs cooling down.
Curbs on real estate investment
While officially the authorities are tightening control on speculative real estate investment, and land transactions, it is difficult to separate speculative investment from domestic investment. At this moment in time there are 20 cities across China with buying curbs in place and there are real concerns that more will follow suit in due course. Sometimes it is difficult to know what type of real estate market is operating in China, a capitalist market or a government-controlled market, but this latest move will spook some investors.
Economic growth
While property markets around the world have a significant impact on domestic economies the combined Chinese construction and property sectors now account for 17% of the country’s GDP. As a consequence, if we see further curbs emerging across the country and foreign investors are reluctant to take the plunge then this could see a significant downturn for the Chinese economy.
History shows is that if the Chinese economy is struggling then this will have an impact upon other economies in the region as well as the outlook for the worldwide economy. Even if we do see an upward trend emerging within the Chinese economy, investors are now scratching their heads wondering what the authorities will do next. In many ways they are halfway between a capitalist market and a government-controlled market which does not help investor confidence.
Real estate developers
As we touched on above, concerns about further curbs across the Chinese real estate market impacted the Hang Seng share index. This fell by 1.3% today but leading real estate companies on the Chinese stock market suffered even greater losses of between 3.5% and 4.8%. Any reduction in activity across the real estate market could impact the cash flow of these leading companies and put some of them on the edge of a financial precipice.
Slowly but surely any confidence investors had built up in the Chinese authorities in recent times is beginning to evaporate. Investors need more than anything a calm political background from which to consider their next real estate purchase. Whether the Chinese authorities are able to accommodate this environment remains to be seen.