International investors should be aware that China’s real estate market has become vastly overheated. The property market saw prices soaring by 20% in the country’s four largest cities in 2013. In Beijing the nations capital, prices ratcheted up by 16% last year alone. Shanghai saw increases of 17% with both Guangzhou and Shenzhen witnessing 20% gains. This was already after impressive gains over the last few years. All 70 of the major cities in China were observing rapid increases in property values with the exception of just one city. Finally in 2014 prices have not only leveled off they have even begun to fall. The issue is how far and how fast. A soft landing is the goal of the Chinese government. It will matter greatly to the world economy given the importance of China.
It is estimated that one third of the Chinese GDP (Gross Domestic Product) comes from real estate and related industries. Continued economic growth is in jeopardy if the housing market implodes.
The Chinese government made some attempts to rein the runaway speculation in the housing market. This included increasing the down payments on second mortgages. The central government started to audit skyrocketing local government debt and the growth of a huge shadow-banking sector. They were growing in concert with the inflated housing market. The local politicians provided the land and the banks provide the money for development.
There are some that claim that China is having some success in deflating the property bubble, that was fueled by years of cheap credit. It is true that construction is slowing down somewhat, with prices dropping in some markets. There is already a growing sector of unemployed migrant construction workers.
As property sales continue to slow, more and more urban areas of China are lifting restrictions on home sales. Some of the restrictions included denying official permission to buy more than two homes in a particular area. This was for individual buyers who had documentation to prove residency which in China is known as hukou. That is official permission to actually live in the area of residence. Those without proof were limited to the purchase of only one property. In many Chinese cities these limitations began to be applied when property prices exploded in an upward trajectory in 2010 and 2011. For the first time in 6 years real estate prices in many Chinese cities are now falling. It is happening on a monthly basis.
Since the decline has been so precipitous in 2014, many urban areas have announced government policies that would enhance support for mortgage loans. Officials have also taken steps to help property developers raise money for new property development.
The largest cities in China including the aforementioned have kept some restrictive policies in place. This is also the case on the island of Hainan which is still booming partly because of its close proximity to Hong Kong and Macao. The cities of Zhuhai and Sanya located in the southern part of Hainan have benefited greatly from these two prosperous city states as well as the geographic closeness to Guangzhou (known formerly as Canton). The city is the third largest in China.
For the first 8 months of 2014 homes sales have declined by an average of 30% in the cities of Beijing, Guangzhou, Shanghai and Shenzhen. This was complemented by a drop in prices of new residential units in these four cities on an average of 1% from July to August. This is not alarming due to the fact of the extraordinary increases from previous years. Prices had become so high that it was beginning to choke off economic development in these urban areas.
In Sanya and Zhuhai residential property prices are still increasing because inventories are low. However, the total floor space being sold is declining. Regardless, inventory is still able to be emptied within a year of completion. In many other urban areas it is as high as 18 months.
Why does this matter outside of China? This is because of the role China plays in overall global output. It has become an engine of growth for many countries in the world. Since 2007 China has become more important than the United States to the world economy. Between the years 2007 to 2013, the global economy has grown by 31%. China has contributed 10.1% of this growth, which is nearly one third. In comparison the United States contributed just 4.1% followed by Brazil and Russia at 1.6 and 1.4 respectively. The nation of India contributed 1.1%. Australia and Japan 1% each. Every other country in the world added less than 1% of total global economic growth.
Projections for the period 2013 to 2019 show China contributing 7.6% and the United States 7.2% to world economic growth. Germany, The United Kingdom and India are all tied for third place coming in at 1.7%. France and Japan follow at 1.2 and 1.1 respectively. The other nations of the world will contribute less than 1% on an individual basis.
This statistics indicate the importance of China to the world economy but it also shows how China is projected to have slower economic growth rates than in the past. Some of this will be due to the slowing real estate market in China. The country saw GDP expansion of above 10% since 2003 peaking at 14% in 2007. In 2008 during the world financial crisis growth was still close to 10%. The year 2009 the economy slowed even further but remained above 9%. After a spurt in 2010 above 10% once again, and a rate of 9% in 2011 the GDP growth in China has dipped below 8%. Projections for 2014 to 2019 indicate growth declining even further with rates between 6% and 7%.
It will matters enormously to the world economy. China is the first or second largest trading partner for more than 50 countries around the world. These include Canada, Japan, Russia, many nations within the European Union and of course, the United States.
Much depends on whether Chinese government officials can manage a cottony landing place for the property market within the country. This writer contrary to many analysts, is not convinced it has been achieved. Whereas monthly price increases although small continued until June of this year when it only increased 0.1%. In July it declined by 1% across the board.
The decline is also occurring in commercial development as well. The growth in sales for this year is 8.4% below what was accomplished in 2013. Last year saw growth begin in excess of 35% at the beginning of the year in commercial building sales. The rate continued to drop throughout 2013 to negative growth by the end of the year.
The rate of investment in Chinese real estate has also plunged. In the summer of 2013 it was still expanding at a 19% annual rate. It has declined to 13.7% and still declining.
The slowing economy in China will lead to a decline in commodity prices on a global scale. This will hit developing nations that are more reliant on this form of trade the hardest. It will most definitely lead to slower growth rates in most parts of the world.
If the property market in China collapses in both the residential and commercial sectors this impact will be dramatic on world markets. It could very well lead to recessions in a number of countries that have become quite dependent on trade with China. This will impact even more countries, and you will soon witness a general slow down in GDP growth across the globe.
Another side effect will be as money leaves the Chinese real estate sector, this capital will be looking for new real estate markets abroad. What investors may soon witness, is a general increase in property values in financial and industrial cities in a number of countries across the world. This will most likely occur in Europe, other cities of East Asia, the United States, Canada and parts of Latin America.