China’s Property Bubble: Bursting or Deflating?

Talk of a Chinese property bubble bursting is becoming newly fashionable, at least in the Western press. Yet Beijing, as a matter of policy, has been driving down real estate prices since early 2010 through a mix of administrative controls and credit restraints.

These policies have had an effect. In November, new home prices fell month-on-month in 49 of the country’s 70 largest cities, with four showing year-on-year falls, according to the National Bureau of Statistics. Standard Chartered Bank pegs the fall in prices in the Tier 1 and 2 cities at 10% from the peak. More dramatic has been the decline in the number of new home sales, especially in big cities where property markets have been frothiest. Residential real estate sales in Shanghai were down 16.5% in the first 11 months of this year, for example. Tales of unoccupied properties and restive investor-buyers abound.

Against a background of slowing economic growth–and a growing realization of how great a share real estate accounts for in China’s GDP (10%+, more than the share in the U.S. just before the sub-prime mortgage crisis blew up)–the fall in prices has opened the debate about whether the current property curbs should be eased. It boils down to whether you think the overheated property market has been sufficient and sustainably cooled, or not. Steve Dickinson of the China Law Blog has an example from Qingdao about how local officials’ views can be diametrically opposite to those of central governments. (While we are on recommend reading, Patrick Chovanec’s piece in Foreign Affairs provides an excellent primer on the why prices ran up as high as they did.)

However that debate breaks, the two core reasons for the run-up in real estate prices–low real interest rates and the dependence of local governments on land revenues–are not being addressed. That is where the real worry should lie as they speak directly to the ticking time bomb of local government debt, and the danger that poses to the banks who have funded it. This Bystander believes as a result that prices could a further 10% to fall in the larger cities, but that Beijing won’t want them to fall much below that. Policymakers are already showing some targeted local relaxation of the credit constraints to preempt a wave of real-estate bankruptcies. The bubble is being let down, beyond doubt, but it has been for a while. It is only now that we are starting to see, in American investor Warren Buffett’s phrase, who has been swimming naked.