Over the last couple of years the Chinese economy has been extremely volatile and while current reduced growth levels is but a dream for many European countries, there has been a major slowdown in Chinese economic activity. This is having a significant impact upon the Chinese real estate market and indeed over the last 12 months we have seen a number of prominent Chinese property companies struggling to survive. The authorities have stepped in with an array of helpful measures which have included strategies such as buying up empty properties and selling them to families at a loss.
However, the last couple of months have seen a significant recovery in Chinese property prices in some of the larger cities. Is the market now set for a period of recovery or is there trouble ahead?
Year-on-year growth
Much of the focus over the last few months has been upon China’s major cities with the likes of Shenzhen showing year-on-year price increases approaching 80%, Shanghai over 60% and even the likes of Xiamen managing growth approaching 30%. The situation regarding the wider market is very different and many local property markets are still struggling to find a level. However, while supporters of the Chinese real estate market have highlighted the increase in city located properties is there still trouble in store?
Are we headed for a US sub-prime mortgage type crash?
There has been speculation over the last few weeks that investors looking towards China’s major cities have been stretching mortgage regulations to the limit. Indeed a number of investors have been borrowing further funds to cover deposits basically stacking debt upon debt. The speculative nature of many of these investments also calls into question their long-term support of the Chinese real estate market. What would happen if there was a short-term wobble in demand and prices?
Historically when city centre properties become “too expensive” investors then spread their wings moving to the outskirts of the more expensive areas. This new focused demand often increases prices in these “better value” areas and the pattern continues. However, it is unclear at this moment in time whether this historic pattern will emerge with growing concerns about the security of mortgage arrangements.
Is there really a crisis on the way?
It is very difficult to forecast with any real confidence a forthcoming crisis let alone in China where the authorities still dictate many areas of everyday life. What is clear is that average property price to income ratios are certainly stretched reaching a phenomenal 76 in Shenzhen at the end of 2015. Even with the best will in the world this situation cannot continue and when the market does go pop it will be difficult for the Chinese authorities to stop a total collapse.
When you also take into account the potential impact upon the worldwide real estate market, if the Chinese market collapsed, and restricted funding in money markets, why have we not learned from the US sub-prime mortgage collapse of 2008? Is the Chinese government to blame? Should further restrictions be introduced? When we reality hit home?