Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

China's property market and the global economy

By Arthur Thomas - posted Tuesday, 1 February 2011


China's continuing high rate of economic growth is driving many economies around the world struggling to recover from the effects of global economic financial crisis.

Driven by the US$586B stimulus package, reckless bank lending and imbalanced development, China's state dominated property boom is a major contributor to economic growth.

It also has parallels to the US sub-prime crisis involving reckless mortgage lending, bundling and sale of hi-risk mortgages to investors, and blinkered government oversight, suggesting economic and political pain for China in 2011.

Advertisement

Problems facing Beijing

The boom presents Beijing with multiple challenges comprising a major surplus of overpriced vacant housing, a shortage of affordable housing, square kilometres of overpriced, vacant, and underperforming commercial property investment.

The combined negative effect of these surpluses is compounded by attempts to slow inflation, a slowing property market with high levels of local and central government real estate related debt, plus rising state bank NPL risk that will have a severe effect on local and national GDP growth into 2011 and 2012.

Beijing desperately needs effective policies and new development options capable of maintaining both local and national GDP growth as well as ongoing foreign investment.

Government strategies

Beijing policies to stabilize housing prices include -

  • raising lending interest rates
  •  increasing deposits on 2nd and 3rd new homes
  • limiting sales of new homes to one per buyer
  • cooling property prices
  • keeping the yuan low
  • restricting inflation to "reasonable levels"

Beijing has also made clear its intention to "crack down" on -

Advertisement
  • profiteering
  • bank lending breaches
  • underdeveloped land hoarding
  • delaying sales for bigger profits

While government rhetoric may sound impressive, developing and implementing the complex mix of effective policies of inflation and currency control, as well as property speculation and demand for affordable house prices, may exceed the capacity of the CCP.

Implementing policy

Beijing proposes repossessing land owned by developers but not developed within the required time frame from date of purchase, for construction of new housing to meet demand.

Banks followed government policy, implementing lending restrictions and raising interest rates and deposits on purchases of 2nd and 3rd homes.

Several cities adopted Wen Jiabao's recommendation of one new home per family, but the lack of affordable housing deters potential buyers.

Ineffective government policy

Beijing's policies to counter the oversupply of vacant overpriced property and related local government and state bank debt, are seriously flawed.

They failed to address affordability for owner/occupiers, and ignore implications of oversupply and investor "demand" in the top end sector.

It suggests not only failure to comprehend market dynamics, but a reluctance to implement measures that could devalue local and central government real estate interests.

Policy makers have ignored the fundamentals driving the market -

  • development motivation driven by higher profits in top end housing
  • investor demand for top end property
  • local government support for developers of top end housing and grandiose projects

As long as developers focus on the top end of the market, investment options in China are limited to the property and stock markets, and state media support of the property boom, the strategies will be ineffective.

Prestige projects have the support of local government because they attract domestic and foreign investment, and boost local GDP.

Motivating developers and local government to focus on building affordable housing to meet mass-market demand housing on low profit margins will be a major challenge.

In parallel to the demand for affordable mid level housing, is the huge demand for low cost housing. This comprises towns and communities forced from their homes by desertification, water shortages and natural disasters, while other communities and farmers are displaced by major infrastructure projects. Housing and commercial project developments force the relocation of thousands of others.

The mechanics and effectiveness of the repossession policy, when considering government vested interest in real estate however, remains unclear.

Increasing deposits on 2nd and 3rd homes is circumvented with a "fee" paid to bank officials.

Central and local government rhetoric on housing ignored 4 crucial factors -

  1. Official statistics confirm 64.5M, or 70% of vacant new homes, held by investors with no intention to occupy, indicate this sector of the market is saturated, and beyond the affordability of owner-occupiers

  2. The residual 30% supposedly represents the owner-occupier market, indicating an overpriced and undersupplied market sector

  3. Investors are dominated by SOE controlled companies, divisions, subsidiaries and related listed property investment companies

  4. It is improbable for individuals to be the major investors in this massive inventory of vacant space

Corporate investors are unaffected by government restrictions on house purchases, since they do not apply for individual mortgages from the banks

The official statistics confirm owner-occupiers and individual speculators are not the primary causes of high housing prices.

The state dominated corporate investor sector paid the high prices for the 64.5M vacant homes as evidenced by the high rate of exposure to the property by state fund managers, especially China Asset Management Company.Challenges facing Beijing's policy on undeveloped land -

  1. Finding construction companies to build low profit margin housing
  2. This construction will undermine attempts to reduce the existing inventory of vacant top end housing, by diverting buyers to affordable homes

To bring the scale of unoccupied hones into perspective, using the CCP's model of the single child family, these vacant properties have the capacity to accommodate around 15% of China's total population in luxury housing.

Policy influences

  1. Beijing's price easing policies are influenced by investor companies and individual government connected speculators who will suffer financially
  2. Opposed to reducing prices to affordable levels for the mass market, government policies to "stabilize" house prices appear more designed to maintain current high levels and protect vested real estate related interests of government.
  3. Banks will be at risk since loan values could exceed property values.

Beijing's challenge is to reduce the massive inventory of overpriced, top end, unoccupied, speculator owned housing and commercial floor space without loosening bank lending, raising inflation, or triggering a property price collapse.

The effect of the hukou

Restrictions question the credibility of the official 70% investor statistic, suggesting a much higher figure.

The hukou is a major detractor for owner/occupiers in cities with rampant property development, by penalising potential non-resident owner-occupiers and the small speculator, while benefiting investor corporations.

SOE related development and property investment companies are exempt from hukou restrictions.

Property degradation

Disposing of 64.5M vacant homes will take many years, during which time property will degrade and undermine the asking price.

Time is not the only factor that degrades vacant properties.

Poor building quality, materials and fit out, combine with insect, rodent and weed infestation in and around unoccupied buildings

Lack of maintenance creates serious problems in unoccupied buildings affecting systems control, security, lighting, lifts, heating and cooling. Potable water trapped in the piping system for prolonged periods will foul.

High acid rain levels, industrial pollutants and airborne particulates contaminate exposed external installations, foul water in non-operating air conditioning cooling towers, and corrode exposed structural metal works.

Owners and occupiers will face high insurance premiums to offset risk in vacant and/or sparsely populated buildings lacking appropriate maintenance and security.

Vacancy driven degradation can also degrade values of surrounding properties and the locality in general.

The growing inventory of current construction was excluded from the 64.5M estimate.

The commercial market faces similar problems in finding corporate lessees for the square kilometres of vacant and/or sparsely occupied buildings exhibiting signs of deterioration.

Based on current demand, analysts suggest reducing the unoccupied commercial space could take up to 15 years.

Depending upon the degradation rate of buildings and surroundings, selected projects are likely to be demolished on grounds including health, safety and bankruptcy.

Beijing's attempts to offload SOE property related debt to comply with the State-owned Assets Supervision and Administration Commission edict, face the challenge of maintaining values of degrading vacant property in a declining and oversupplied market.

Property development alternative

Local governments are now prioritising metro development in their budgets to replace falling revenues from land sales and property development.

This reflects CCP plans for a 300% expansion of city rail networks to 3,000 kms by 2015, under the slogan "A city without subway is an incomplete one".

Beijing and Shanghai will double their existing networks by 2010.

Metros consume major capital investment, land, electricity, road transport, heavy equipment, and especially labour. They are also the exclusive domain of SOEs in construction and material and equipment supplies.

Metro rail line component averages US$80M/km.

The current 11 major city metro operations are government subsidized.

33 lesser cities are constructing or planning new metro systems that will rely more heavily on government subsidies.

The problem for these capital-intensive projects may be one of debt ridden local governments raising loans from debt-laden banks by for systems that will require ongoing government subsidies.

China's property market and the global economy 2011

Throughout 2010, Beijing's rhetoric has become more urgent in attempts to present an image of economic stability.

Moves to cool the property market, reduce bank debt risk, effectively manage inflation, and maintain foreign investment confidence in China only raises the level of urgency.

Approaching the end of 2010, China's property market and linkages have the potential to trigger economic chaos.

Attempting to cool the property market, Beijing ignores the dangers of inflated mortgage values, debt levels, and practicality of reducing huge inventories of unoccupied and overpriced housing and commercial space.

How to recover the investment and pay outstanding debt on top end housing units and facilities, plus square kilometres of vacant and underperforming commercial space without triggering a serious decline in the property market is a major challenge for the CCP.

Because of the extent of investment in vacant floor space, banks and mortgage holders will soon have to move to cover debt risk.

Once this happens, the rush will be on as investors panic to salvage what they can in a saturated, overpriced, and falling market.

China's property market is inextricably linked to the stock market, state bank debt, local and central government debt, and institutions holding overvalued mortgages.

A decline in values will trigger potentially severe ripple effects in those sectors, flowing to foreign investment.

Already in overcapacity mode in several key sectors, Beijing's problems are further complicated by rising inflation and pressure from trading partners to revalue the RMB.

China's economic growth is driven by domestic infrastructure and property development, but has low domestic consumer spending and declining consumer goods exports.

Beijing's dilemma is one of its own making by avoiding early corrective measures.

Regardless, steps to reduce inflation and speculation in the housing sector, and not allowing the RMB to rise, will have a negative effect on property, bank debt risk, the stock market, and foreign investment.

A property boom with Chinese characteristics

This is a property boom with Chinese characteristics, unrelated to property bubbles experienced in market economies around the world.

China's is one of stimulus fuelled state driven speculation, excluding major participation for private enterprise, and supported by government directives to banks to lend, and local government and state enterprises to borrow and build.

The stimulus was a response to the CCP's goal to build infrastructure, housing, utilizing China's huge labour force.

The Irish government's intervention to save private banks overloaded with debt from its property crisis, effectively converted private debt into government debt and the eventual bail out by the EU.

Beijing's problem is the result of state debt from the very start, with no EU bailout.

Analysts suggest China's property market is overvalued from between 15% to 50%, and in excess of 70% in cases.

A 10% decline in property prices could raise defaults by 300%, triggering a wave of default rates.

A 30% decline could raise defaults by 500%.

The bottom line

The CCP has ignored -

  1. current home prices are beyond the reach of average owner/occupiers
  2. home ownership only increases when house prices reach the affordability level of the owner-occupier market.
  3. demand for low cost housing
  4. implications for massive inventories of unoccupied housing and commercial space
  5. combined effect of unoccupied and non-performing property investment, and related debt
  6. degradation effect on overpriced securities
  7. local government property related debt
  8. bank NPL risk

The CCP faces a daunting economic challenge in 2011.

Potential buyers will quickly respond to affordable housing, undermining demand for vacant top end properties.

Falling property values will cause overvalued mortgages in wealth management bundles to plummet below their book values, exacerbating problems for local government and investors efforts to recover their investment, and for banks to cover NPL risk.

Focus on heavy investment in short-term growth created massive overcapacity, local government and bank debt, major market imbalances, housing shortages.

Add to this, escalating pollution, water shortages, rising inflation and food prices and the potential for rising civil unrest.

Indicators of near panic in the banking sector is reflected in the rush of capital raisings, state bank bond sales, and 6 increases in requirement reserve ratios to date in 2010 that are certain to continue through into 2011.

It is highly likely the measures are too little and too late, lacked coordination between the central and state banks, and affected by political interference.

Bank short-term borrowings will certainly rise in times of increasing pressure to reduce risk and rising interest rates.

Beijing's own QE is already in progress and could overshadow Washington's QE2.

Time for review

A 5% decline in economic growth could trigger a potential 20% decline in global commodity prices.

It may be timely for nations reliant on China's demand for resources, to focus more on the potential ripple effect on their economies in the event of a price slump in China's property market and begin to modify their economic modelling for 2011 through to 2015 to reflect more on self-reliant domestic policies.

  1. Pages:
  2. 1
  3. 2
  4. 3
  5. ...
  6. 6
  7. 7
  8. 8
  9. All


Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Arthur Thomas is retired. He has extensive experience in the old Soviet, the new Russia, China, Central Asia and South East Asia.

Other articles by this Author

All articles by Arthur Thomas

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment Comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy