The Future of China: the Worlds Largest Property ‘Bubble’?
China’s megacities cities occupy the top 4 spots of the worlds most expensive cities to buy property, but is this upwards only market too good to be true?
The Chinese economy shares many of the same characteristics displayed in Canada’s present property bubble; rising property prices and extraordinary levels of Non Financial Debt (NFD 290% of GDP) . The actual value of Canada’s non financial debt however pales into insignificance in comparison to China’s (Figure 1) and is a serious cause for concern.
Whilst for both countries; key indicators (NFD, Property Price Index, GNI per capita) appear to move reasonably in tandem up to the end of 2015. China’s Property Price index (PPI) takes a sudden vertical climb during the following two years adding close to 40 units to the index.
In fact China’s PPI has soared past Celtic Tiger levels, which signalled the start of a chain reaction of mortgage defaults and the collapse of the Irish economy back in 2009. The issues faced in China make the Canadian economy look rational. The presence of a property bubble in China is undeniable, so the question remains if, how and when it may burst.
China has a history of teetering on the precipice between massive government sponsored growth and precarious overcapacity and supply. In the previous financial crisis China experienced losses between 4 and 6 % of GDP due to lack of demand for its surplus of steel and manufacturing exports.
History now appears to be repeating itself, this time in China’s construction industry. Data shows that both the number of new building contracts being signed and construction employment levels are increasing year on year at what looks to be an exponential rate.
Despite rapid growth in construction enterprises, we are seeing alarming increases in days payable and backlog of purchased versus actual constructed floorspace. Together with increased borrowing suggests that top developers are utilising capital in acquiring land, rather than constructing existing projects. The result, increasingly grandiose off-plan developments sufficient to keep the construction industry building for almost the next decade.
There is an extremely high risk of oversupply in China’s property market, combined with skyrocketing property prices, particularly polarised in Tier 1 cities, making Beijing, Shanghai, and Shenzhen most vulnerable to any external shock.
Whilst recent government regulations prevent the re-sale of properties for a period of 2–5 years in most vulnerable cities, the impact of these measures remains to be seen. It is however likely that ‘property flippers’ rife in China’s largest cities will be caught by these new regulations, fuelling additional risk in Banks’ consumer credit and mortgage back securities operations.
Trumps’ Trade War could be the external shock to burst China’s tier 1 property bubble, thus triggering a domino effect on the subsequent tiers with overall dramatic negative impact on the Chinese economy and serious knock on implications worldwide.
Aggregated from Sources: BIS, World bank, China National Bureau of Statistics using I-Python Notebooks, Pandas and Matplotlib
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