That is the building which houses the most expensive apartment in Hong Kong. The five-bedroom apartment sold for $56.6m on Wednesday, sparking further speculation that the city — and the rest of China — might be in the grips of a real estate market bubble.
And on Thursday, John Mauldin‘s latest newsletter added fuel to the effervescence-fire, carrying an analysis by STRATFOR, a geopolitical intel company. The whole thing is worth a read — not least for its concise history of China’s real estate market — but we’ve selected a few of the most salient points below.
To begin with, STRATFOR are in no doubt that China is in the midst of an emerging real estate bubble — in residential and now, potentially, in commercial real estate too:
The real estate market in China, particularly the residential side, is a burgeoning bubble that is growing bigger and more breakable by the day. Land and housing prices were already rising steadily when Beijing’s stimulus package hit the sector in early 2009. Now prices are surging, with developers, bureaucrats and investors cashing in while urban Chinese – once encouraged to invest in home ownership by the central government – become less and less able to buy.
. . .
The bubble has grown mainly on the residential side of the market, where there is more demand and higher profits to be made. However, while fewer developers and investors have been chasing nonresidential projects, Beijing’s 4 trillion yuan ($586 billion) stimulus package in early 2009 has generated more interest and activity in the commercial side. Indeed, there are signs that commercial real estate may also be headed for a bubble, and STRATFOR will be watching the situation closely.
The bubble, STRATFOR says, is almost entirely due to the liquidity and stimulus operations pursued by the Chinese authorities following the global financial crisis:
Following a temporary drop toward the end of 2007, land prices rose steadily, then began surging again with Beijing’s stimulus package and a flood of easy credit in 2009. With much of this money flowing into the real estate sector, major beneficiaries included large state-owned enterprises (SOEs) involved in speculative real estate and housing investment, contributing to the inflating bubble. Among the 10 highest-priced land purchases in major cities in the first half of 2009, 60 percent went to SOEs.
Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country’s underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution – limiting the flow of cash and credit – could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices.
Rising property prices are also coinciding with rising vacancy rates (for instance the reportedly empty replica-English village, ‘Thames Town’), STRATFOR says. The company cites a 2009 report by the Shanghai Yiju Real Estate Research Institute showing that the average vacancy rate for private housing had risen to 16.64 per cent by the end of 2008, with rates as high as 30 per cent in some districts.
Crucially, however, these are not unsold houses. They are houses that have been bought by investors as speculative investments, according to STRATFOR. So while there are fewer and fewer people who can afford to buy houses, there is still demand for more investment housing — which in turn drives prices up even further.
In sum, then, Beijing is faced with a very difficult decision:
Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise.
And just to provide a bit of counter-analysis — Standard Chartered analyst Feng Zhi Wei is out with a research note on the same subject on Friday. And while he agrees that the recent action in China’s real estate sector has been primarily driven by liquidity, he doesn’t think that policy-tightening will hit the sector very hard:
Following the recent release of official data related to the real-estate sector, we have examined liquidity factors both on the supply side of the housing market — including growth in loans to developers and funding sources for property investment — and on the demand side, including growth in home mortgage loans and household savings.
Our findings suggest that liquidity due to household savings and wealth accumulation is the key driver of China’s housing market. While policy tightening may negatively affect market sentiment and result in short-term volatility, we do not expect any material impact on market players as long as China’s economy continues its robust growth. We therefore maintain our stable outlook on China’s residential property sector, and recommend that benchmark investors add exposure to the stronger names on market weakness resulting from negative news flow (see Credit Research, 8 October 2009, ‘China’s HY developers — Land acquisitions and potential new issuance’).
The argument here is that, on the demand side, the strength of China’s household savings rate should help support residential property prices. And on the supply side, even if the Chinese authorities move to tighten in the coming months, developers (supported by recent sales volume) can secure their own liquidity. With charts like this (below) to support his arguments, though, you have to wonder about the conclusion.
Related links:
And now for a Chinese real estate crash? – FT Alphaville
China’s land boom, a datapoint – FT Alphaville
Is China due a reality check? – FT