Fears of a mainland housing bubble are wildly inflated

PUBLISHED : Friday, 15 July, 2011, 12:00am
UPDATED : Friday, 15 July, 2011, 12:00am


One of the main reasons so many people say the mainland's economy is heading for a hard landing is that they believe the country's housing market is an enormous bubble that's on the point of bursting.

You can understand why they think that. Even according to the most conservative estimates mainland home prices have doubled in the last 10 years or so.

And there are plenty of less conservative numbers flying around. The media are full of stories about how prices rose 50 per cent or more last year in some cities.

Those same stories generally go on to tell you how the run-up in prices has been driven by a speculative frenzy. Apparently everyone able to raise the cash - students, young couples, grannies - has been buying as many flats as possible in the hope of flipping them for a handsome capital gain.

Usually there are photographs of vast new housing developments, utterly deserted except for perhaps a single, lost-looking street sweeper. Invariably the caption will tell you these properties are just some of the millions of vacant apartments, snapped up by speculators in search of a quick buck.

Now, runs the argument, the bubble is bursting. A government clampdown on multiple purchases has halted much of the speculation, while monetary tightening has squeezed buyers' access to credit.

With an excess of supply overhanging the market, a steep decline in prices is inevitable, wreaking terrible damage on the over-exposed banking system and the economy at large.

But although prominent commentators, from hedge fund manager George Soros to former International Monetary Fund chief economist Professor Kenneth Rogoff, have sounded the alarm, the evidence for an unsustainable bubble is slighter than they seem to believe.

Sure, there are local pockets of speculative excess. But across the country as a whole, the recent rise in property prices looks modest by international standards.

The first chart above, which comes from a new study by Spanish bank BBVA, shows that the mainland's bull market in property has little in common with bubbles that afflicted the United States and Spain in the run-up to the financial crisis.

According to BBVA's analysis, market prices have not run greatly ahead of the equilibrium levels implied by the mainland's supply and demand dynamics. The bank's study reckons that prices are about 14 per cent overvalued in Beijing; 12 per cent in Shanghai. In Guangzhou, however, they are actually about 3 per cent undervalued. And across the country as a whole, the over-valuation is a modest 9 per cent.

Stephen Schwarz, BBVA's chief Asian economist, does admit that the run-up in mainland prices bears a resemblance to the early stages of the Japanese property bubble of the 1980s, and argues that the bull market could cause problems if left unchecked. But he adds that the recent government measures to contain speculation should be sufficient to prevent the market running out of control.

There are other grounds, too, for thinking the fears of a bubble may be exaggerated. Take affordability. There have been any number of stories over the last year saying how the average flat price in Beijing now exceeds 20 years of income for the average couple.

But these stories should be taken with a pinch of salt. According to one study conducted last year, in official surveys mainland households typically understate their disposable incomes by 50 per cent.

In other words, mainland homes are a lot more affordable than the figures imply. And considering that incomes have been rising even faster than house prices, analysts at Morgan Stanley argue that homes have become more, not less affordable over recent years (see the second chart).

Finally, mainland home-owners are lot less leveraged than their counterparts were in bubble markets like the US. Last year's mortgage debt was just 16 per cent of gross domestic product. In the US it is more than 70 per cent.

And although mortgage lending has grown rapidly, it is far from prevalent. According to Diana Choyleva at Lombard Street Research, half the mainland properties purchased last year were financed entirely out of households' savings, rather than with mortgages.

That means there is little chance of a cascade of forced sales if the market turns south. Instead owners are more likely to sit tight and wait for an eventual upturn.

Of course, none of this means there won't be a decline in prices, especially at the top end of the market. But it does suggest that all the fears of a national property bubble are themselves wildly inflated.