China's property market is unlikely to be a US-style disaster

Households on the mainland are not so saddled with debt as pre-crisis America, and future demand for property is likely to be strong

PUBLISHED : Wednesday, 08 October, 2014, 6:05am
UPDATED : Wednesday, 08 October, 2014, 6:23am

You would have seen the images: identikit tower blocks reaching for the skies; skeletal cranes standing idle; lifeless blocks of flats amid the detritus of construction.

Photo editors used to turn to these images to illustrate the mainland's "ghost cities". Of late, they seem increasingly apt in indicating a broader malaise: falling property prices; slowing land sales and construction activity; the impending day of reckoning for highly indebted local governments.

Indeed, the consensus now is that policymakers need to stabilise property prices to prevent the rot from spreading to other parts of an economy facing its most serious challenge in years. If a disaster were to sink the economy, the thinking goes, the property market would probably be at the epicentre.

But we see a more nuanced picture. It is one that better reflects the size and diversity of a property market in which there are pockets of distress amid an overall slowdown, but where the stress levels are insufficient to trigger a crash.

Why so? For a start, there's still plenty of evidence that indicates robust end-user demand. This is not speculative demand - successive cooling measures in recent years have driven speculators to seek better returns elsewhere.

Measures to curb rapid gains have been so successful that apparatchiks now fear declining property values could jeopardise the social stability that lies at the heart of government policy.

But on the mainland, there are millions of people for whom rising incomes mean the dream of a better home is now attainable. We expect annual housing demand of between nine million to 13 million units over the next five to 10 years as more people move to cities to meet Beijing's goal of a 60 per cent urbanisation rate by 2020 (it's now 54 per cent versus 80 per cent in the United States).

Furthermore, some 62 per cent of existing urban households, or around 120 million households, live in homes built before 2000 where families may be sharing bathrooms and kitchens with neighbours. The majority of these people are expected to drive "upgrading" demand over the next two decades.

There are other indicators that should, at the very least, raise questions in the minds of those who see the property market as locked on course for a US-style meltdown.

For example, despite superficial parallels with the US in 2007, excessive household debt is not an issue. Mainland households typically have lots of savings and little debt.

Last year, mainland household debt as a percentage of gross domestic product was 33 per cent, as was the proportion of household debt to disposable income. Before the global financial crisis, the numbers in the US were 95 per cent and 125 per cent.

Excessive debt is certainly a concern in relation to the finances of local governments that have used land as collateral for loans. A cooling property market threatens their ability to raise new funds and to refinance existing loans, which will raise the risk of default.

But the cause of any mainland financial crisis won't be found amid soured loans linked to residential home purchases. Unlike in the US, mainland borrowers can't simply walk away from their obligations by declaring bankruptcy if a property's value falls below that of the mortgage.

Properties outside first-tier cities have become more affordable because wage growth has outpaced property price gains in most cities, including provincial capitals. We expect housing affordability to improve even further next year.

There may be bankruptcies among the mainland's 90,000-plus property developers, but the largest companies - the ones that international bond investors are exposed to - compare favourably with their US counterparts in that they operate on a larger scale, enjoy higher growth, earn higher margins and have more cash on their balance sheets.

So what we have is a cyclical downturn in a property market where the fundamental drivers of demand remain intact.

There are buyers on the sidelines waiting for prices to fall further before taking the plunge, and this demand will determine when the oversupply will be cleared. We think inventories could be exhausted as soon as next year in some cities, with prices stabilising by the third quarter of 2015.

Thu Ha Chow is head of Asian credit, fixed income, at Aberdeen Asset Management