Across The Border

Analysts warn Chinese home buyers rapidly approaching their spending limit

Mortgage debt rising at unprecedented speed, while savings levels dip – but analysts divided on property market outlook

PUBLISHED : Wednesday, 28 September, 2016, 2:03pm
UPDATED : Wednesday, 28 September, 2016, 10:10pm

Chinese families are taking on mortgage loans faster than those in Japan did at the peak of its property bubble at the end of the 1980s.

But analysts remain divided on how the market here is likely to pan out.

Jiang Chao, chief economist with Haitong Securities, says 2016 may well mark an “all-time high” for Chinese property, for the simple reason he thinks the borrowing ability of Chinese residents is now close to its limit.

“Even during the most-frothy year, 1989, new mortgage lending was below 3 per cent of Japanese GDP, while the number was 5.5 per cent in China last year,” Jiang wrote in a note issued on Monday.

“The number of young buyers in China is also hitting its peak. The surge in property sales this year is nothing to do with demand due to demographic changes, it’s a phenomenon of speculation amid rising leverage.

“But the overheating is hard to sustain, and is starting to face relatively big downward risks,” he argued, adding home prices in China’s first-tier cities have been rising quicker than GDP growth, as long as it is pegged to the deposit growth rate.

That savings growth in Beijing, Shanghai and Shenzhen, however, is now falling to almost zero, suggesting a potential sharp turn around in liquidity levels, he said.

Even during the most-frothy year, 1989, new mortgage lending was below 3 per cent of Japanese GDP, while the number was 5.5 per cent in China last year
Jiang Chao, chief economist, Haitong Securities

Larry Hu, China economist at Macquarie Securities, is also concerned the continued speed of growth in household debt in China is becoming alarming, and that 2016 is highly likely to mark “a sales peak for the next two or three years”, but definitely not a ceiling in prices.

“With outstanding family debt stands at around 40 per cent of China’s GDP, there is still room for further growth,” he said, noting the corresponding number in South Korea is above 100 per cent, and was at 80 per cent in the US, just prior to its subprime lending crisis in 2008.

As China continues relying on credit expansion to support economic growth, other analysts too have started warning about the rapid build up in household credit, which has effectively fueled the latest property boom, and in turn has stabilised economic conditions.

Monthly mortgage lending has been growing at close to 500 billion yuan on average this year, taking up almost half of all new loans.

Mortgages now account for more than half of the total sale prices of the average property, up from 33 per cent in 2013 in China, but worryingly that’s more than the 50 per cent in the United States, again just ahead of the financial crisis, Jiang said in the note.

China’s current outstanding household debt stands at around 40 per cent of GDP, up from around 23 per cent in 2005, according to Bloomberg data.

Although many have been vociferous in warning about the country’s runaway property prices, including some of the country’s leading scholars, few analysts expect the growing Chinese property bubble to burst anytime soon, however.

Iris Pang, an analyst with Natixis said: “The US subprime crisis was caused by poor assessments by lenders and brokers of people’s ability to pay their mortgages. But there is no such risk in China as mortgages are underwritten by banks directly.

“Unless there’s a sudden rise in unemployment, meaning more debtors cannot pay their mortgages, forcing banks to repossess and try and sell the homes to recoup their losses, it’s hard to see the bubble bursting.”

Property prices have recovered since May 2015, especially in tier one and two cities, and most strongly in Shenzhen, Shanghai, Beijing – cities with bigger populations and more importantly, maintained economic strength.

According to CREIS, a mainland property data provider, average property prices in a sample 100 Chinese cities have risen 17 per cent since their trough in April 2015, and overtook their historic average high in August, at 12,270 yuan per square metre.

The average price in a sample of ten largest cities have jumped 24 per cent from March 2015, and also reached an historical high last month, at 23,568 yuan per square metre.

During the first eight months, national residential property sales increased 40 per cent year on year.

Nomura said in a report issued last week that it believes strong sales will continue in the second half and tier-two city developers will be the biggest beneficiaries.

“Our top picks remain China Overseas Land and Investment, CR Land, CIFI, and China Jinmao,” the report said.

“And we upgrade Longfor from Neutral to Buy, for its quality growth with double-digit annual earnings growth in financial years 2016 to 2018.”