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China's property market
Home truths
China’s economic boom can survive a property bust
May 27th 2010 | BEIJING AND HONG KONG | From The Economist print edition
A DISCARDED toilet bowl lies on a pile of rubble in Tongzhou, a Beijing suburb which is busily remodelling itself as a “modern” and “international” city. On one side of the railway, a string of single-storey dwellings, built of brick and tile, have yet to be demolished. Their occupants make the most of the surrounding debris, loading bent window frames onto the back of bicycles to be sold as scrap. On the other side of the tracks tower new blocks of flats, more than 20 storeys high, waiting for their first residents.
Tongzhou’s new flats are one example of the property boom in China, where 1.87 billion square metres of living space were under construction in the first quarter of this year, 36% more than a year earlier. The boom has resonated widely. Banks have expanded their mortgage-books briskly; local governments are filling their coffers by selling land to developers or to the “urban investment vehicles” they sponsor. Property and construction represent about 10% of China’s GDP, not counting the consumer goods that homebuying inspires, such as the quilts and curtain rails on sale in Tongzhou’s market.
Home prices in 70 Chinese cities rose by 12.8% in the year to April, according to China’s National Bureau of Statistics. That was a record, and probably an understatement. The bureau also counts the total sales value of homes—384.6 billion yuan ($56.3 billion) in April—and the floorspace sold (72.4m square metres). Dividing one by the other gives an alternative gauge of prices, which increased by almost 18% nationally in the year to April and by over 95% in Beijing (see chart 1).
But China’s policymakers seem determined to disappoint fortune-hunters. In April they imposed new curbs on housing speculation, raising down-payment requirements and mortgage rates. In some property hotspots, out-of-towners cannot get a mortgage until they have paid local taxes for at least a year. Buyers must make at least a 50% down payment on a second home, even if it is their first mortgage. In Beijing they cannot buy a third home, even with their own money.
The measures seem to be working. Stephen Green of Standard Chartered reckons that prices of new homes fell by over 20% on average in the first week of May in Beijing, Shanghai and Shenzhen, although he cautions that this may reflect the mix of homes on offer, as developers keep their best properties off the market for now. In Tongzhou, prices have fallen by 13.4% since mid-April, according to the Beijing Times. The worry now is that a bursting property bubble might do damage to China’s lenders, ruin local exchequers and cast a pall over its economy—and the countries which sell to it.
In China’s biggest cities, such as Beijing, Shanghai, Shenzhen and Guangzhou, prices did rise too far and too fast. To buy a 100-square-metre home in the capital, the average Beijing household must now spend 17 years’ income.
Across the country as a whole, home prices are nine times the average income of urban households. But China’s property market does not yet serve the average household, as Tao Wang of UBS points out. Many city-dwellers live in dormitories provided by their companies or flats obtained from their state-owned employers after a 1998 reform, which privatised much of the housing stock. Since then, only 48m homes have been sold on the market, Ms Wang estimates, in a country with 215m urban households. If the first customers were also the richest, then China’s property market has so far served only the top 20-30% of households.
China’s homebuyers also include a younger generation who missed out on the 1998 windfall (described by Andy Rothman of CLSA, a brokerage, as the “largest one-time transfer of wealth in the history of the world”). But thanks to China’s “one-child” policy, a newly married couple can count on the undivided support of their parents to buy a new flat. That makes China’s home prices look more affordable.
Cash in hand
It is true that China’s households are increasingly turning to the banks, as well as relatives, to help them buy a home. Mortgages grew by 53% in the year to March. But the boom has not lasted long enough to leave too much debt in its wake. The ratio of housing loans to GDP is still only 15.3%, compared with a peak of 79% in America (see chart 2).
Prices would have to fall a long way to push borrowers “under water”, owing more than the value of their house. The average mortgage is for less than 50% of the value of a home, Ms Wang reckons. In Hong Kong, where regulators bar mortgages of more than 70% of a home’s value, prices fell by almost half in the three years after the Asian financial crisis, yet mortgage delinquencies peaked at 1.4%.
If mortgages did turn sour, how badly would China’s banks suffer? China Merchants Bank’s mortgage book grew by 70% in 2009. But mortgages still amounted to only 23% of its total loans. In China’s other big banks, the share is less than 20%. Loans to property developers account for another 8% or so, according to Mr Rothman.
Local governments may be more exposed. They suffer from a chronic shortfall of tax revenues, which they partly fill by expropriating land from farmers and selling it to developers at a hefty markup. Their dependence on property for income is often overstated, however. They are counting on land sales and property taxes for less than 17% of their revenues this year, according to Vincent Chan of Credit Suisse, once fiscal transfers from the central government are taken into account.
More concerning is the effect on their assets and liabilities. Local governments cannot borrow directly so they borrow through investment vehicles instead. These vehicles take loans, issue bonds or pool capital with private firms to fund infrastructure projects, including housing.
How much they have borrowed is a matter of fierce debate. The China Banking Regulatory Commission says their debts amounted to 7.4 trillion yuan at the end of last year. Victor Shih of Northwestern University, in Illinois, thinks they could already be as high as 11.4 trillion yuan (with another 12.7 trillion in untapped lines of bank credit).
The projects financed by these loans make fiscal sense as long as they add enough to the local tax base to cover their costs. A property slowdown might endanger some projects by this yardstick. It might also hurt the value of the land that local governments have offered as collateral for their borrowings.
Mr Shih’s estimate (not counting the untapped credit lines) would add another 34 percentage points to China’s ratio of public debt to GDP. But even then the burden would be little more than 50% in an economy growing at over 10% in nominal terms. China’s local governments are no doubt wasting a lot of money. But China’s government has a lot of money to waste.
Pessimists compare China to Japan in the 1990s, when a rising economic power, gaining ground on America, suffered an asset bust that has haunted it ever since. A recent study by the Bank of Japan concludes that China does indeed resemble its eastern neighbour—but in the 1970s, not the 1990s. Like Japan then, China today has a strong demand for housing, fuelled by fast growth and rapid urbanisation, and a tolerable exposure to debt.
Mr Rothman and his team surveyed over 350 middle-class households outside China’s biggest cities, where prices are at least 60% cheaper. They found a taxi driver in Zibo who had saved enough to buy his home without a mortgage, and a professor in Wuhan who owned a flat close to each of the two universities he taught at. Half of the households had paid cash, although many had borrowed from friends and family. Of the others, 86% spent less than 30% of their income on mortgage repayments. Mr Rothman reckons that three-quarters of China’s homeowners remain stuck in cramped, shoddy flats received a decade ago from the government. They are keen to cross the tracks to a new home.
Home truths
China’s economic boom can survive a property bust
May 27th 2010 | BEIJING AND HONG KONG | From The Economist print edition
A DISCARDED toilet bowl lies on a pile of rubble in Tongzhou, a Beijing suburb which is busily remodelling itself as a “modern” and “international” city. On one side of the railway, a string of single-storey dwellings, built of brick and tile, have yet to be demolished. Their occupants make the most of the surrounding debris, loading bent window frames onto the back of bicycles to be sold as scrap. On the other side of the tracks tower new blocks of flats, more than 20 storeys high, waiting for their first residents.
Tongzhou’s new flats are one example of the property boom in China, where 1.87 billion square metres of living space were under construction in the first quarter of this year, 36% more than a year earlier. The boom has resonated widely. Banks have expanded their mortgage-books briskly; local governments are filling their coffers by selling land to developers or to the “urban investment vehicles” they sponsor. Property and construction represent about 10% of China’s GDP, not counting the consumer goods that homebuying inspires, such as the quilts and curtain rails on sale in Tongzhou’s market.
Home prices in 70 Chinese cities rose by 12.8% in the year to April, according to China’s National Bureau of Statistics. That was a record, and probably an understatement. The bureau also counts the total sales value of homes—384.6 billion yuan ($56.3 billion) in April—and the floorspace sold (72.4m square metres). Dividing one by the other gives an alternative gauge of prices, which increased by almost 18% nationally in the year to April and by over 95% in Beijing (see chart 1).
But China’s policymakers seem determined to disappoint fortune-hunters. In April they imposed new curbs on housing speculation, raising down-payment requirements and mortgage rates. In some property hotspots, out-of-towners cannot get a mortgage until they have paid local taxes for at least a year. Buyers must make at least a 50% down payment on a second home, even if it is their first mortgage. In Beijing they cannot buy a third home, even with their own money.
The measures seem to be working. Stephen Green of Standard Chartered reckons that prices of new homes fell by over 20% on average in the first week of May in Beijing, Shanghai and Shenzhen, although he cautions that this may reflect the mix of homes on offer, as developers keep their best properties off the market for now. In Tongzhou, prices have fallen by 13.4% since mid-April, according to the Beijing Times. The worry now is that a bursting property bubble might do damage to China’s lenders, ruin local exchequers and cast a pall over its economy—and the countries which sell to it.
In China’s biggest cities, such as Beijing, Shanghai, Shenzhen and Guangzhou, prices did rise too far and too fast. To buy a 100-square-metre home in the capital, the average Beijing household must now spend 17 years’ income.
Across the country as a whole, home prices are nine times the average income of urban households. But China’s property market does not yet serve the average household, as Tao Wang of UBS points out. Many city-dwellers live in dormitories provided by their companies or flats obtained from their state-owned employers after a 1998 reform, which privatised much of the housing stock. Since then, only 48m homes have been sold on the market, Ms Wang estimates, in a country with 215m urban households. If the first customers were also the richest, then China’s property market has so far served only the top 20-30% of households.
China’s homebuyers also include a younger generation who missed out on the 1998 windfall (described by Andy Rothman of CLSA, a brokerage, as the “largest one-time transfer of wealth in the history of the world”). But thanks to China’s “one-child” policy, a newly married couple can count on the undivided support of their parents to buy a new flat. That makes China’s home prices look more affordable.
Cash in hand
It is true that China’s households are increasingly turning to the banks, as well as relatives, to help them buy a home. Mortgages grew by 53% in the year to March. But the boom has not lasted long enough to leave too much debt in its wake. The ratio of housing loans to GDP is still only 15.3%, compared with a peak of 79% in America (see chart 2).
Prices would have to fall a long way to push borrowers “under water”, owing more than the value of their house. The average mortgage is for less than 50% of the value of a home, Ms Wang reckons. In Hong Kong, where regulators bar mortgages of more than 70% of a home’s value, prices fell by almost half in the three years after the Asian financial crisis, yet mortgage delinquencies peaked at 1.4%.
If mortgages did turn sour, how badly would China’s banks suffer? China Merchants Bank’s mortgage book grew by 70% in 2009. But mortgages still amounted to only 23% of its total loans. In China’s other big banks, the share is less than 20%. Loans to property developers account for another 8% or so, according to Mr Rothman.
Local governments may be more exposed. They suffer from a chronic shortfall of tax revenues, which they partly fill by expropriating land from farmers and selling it to developers at a hefty markup. Their dependence on property for income is often overstated, however. They are counting on land sales and property taxes for less than 17% of their revenues this year, according to Vincent Chan of Credit Suisse, once fiscal transfers from the central government are taken into account.
More concerning is the effect on their assets and liabilities. Local governments cannot borrow directly so they borrow through investment vehicles instead. These vehicles take loans, issue bonds or pool capital with private firms to fund infrastructure projects, including housing.
How much they have borrowed is a matter of fierce debate. The China Banking Regulatory Commission says their debts amounted to 7.4 trillion yuan at the end of last year. Victor Shih of Northwestern University, in Illinois, thinks they could already be as high as 11.4 trillion yuan (with another 12.7 trillion in untapped lines of bank credit).
The projects financed by these loans make fiscal sense as long as they add enough to the local tax base to cover their costs. A property slowdown might endanger some projects by this yardstick. It might also hurt the value of the land that local governments have offered as collateral for their borrowings.
Mr Shih’s estimate (not counting the untapped credit lines) would add another 34 percentage points to China’s ratio of public debt to GDP. But even then the burden would be little more than 50% in an economy growing at over 10% in nominal terms. China’s local governments are no doubt wasting a lot of money. But China’s government has a lot of money to waste.
Pessimists compare China to Japan in the 1990s, when a rising economic power, gaining ground on America, suffered an asset bust that has haunted it ever since. A recent study by the Bank of Japan concludes that China does indeed resemble its eastern neighbour—but in the 1970s, not the 1990s. Like Japan then, China today has a strong demand for housing, fuelled by fast growth and rapid urbanisation, and a tolerable exposure to debt.
Mr Rothman and his team surveyed over 350 middle-class households outside China’s biggest cities, where prices are at least 60% cheaper. They found a taxi driver in Zibo who had saved enough to buy his home without a mortgage, and a professor in Wuhan who owned a flat close to each of the two universities he taught at. Half of the households had paid cash, although many had borrowed from friends and family. Of the others, 86% spent less than 30% of their income on mortgage repayments. Mr Rothman reckons that three-quarters of China’s homeowners remain stuck in cramped, shoddy flats received a decade ago from the government. They are keen to cross the tracks to a new home.
