Do you think China property bubble?

Do you think China property bubble?

Is China really facing a property bubble?
By Cris Sholto Heaton
China is in the middle of a property bubble. At least, that’s what the headlines say. Property sales are up 80% year-on-year. Prices in some hotspots have jumped 20%-30% in a few months. Buyers now queue up when prime new developments go on sale.
But the reality is less straightforward. The Chinese property market is very complicated, and I’m not sure anyone is completely confident they understand it. Arguing that Chinese house prices are in a bubble is not as simple as making the case that US house prices were bubbly back in 2005, for example.
So here’s my take on the situation, based on the data, personal observations, conversations with those in the market and the best of the research that I’ve seen. I’m always interested to get emails from readers working in the areas that I write about, but on this one I’d be especially keen to hear from anyone else working in this sector who has a view as to what’s going on.

The Chinese property market is more complicated than most

First, let’s look at the background. Yes, sales of residential property to individuals are up almost 80% year-on-year. But as the chart below shows, this follows a collapse in 2008. That wasn’t just the result of the global recession. The government had clamped down on real estate late in 2007 because it was concerned that a bubble was building. As a result of this, China’s economy was already slowing significantly before the crisis escalated in September.

Figure 1. National Bureau of Statistics, real estate sales to individuals, year-on-year percentage change
Property prices have seen decent gains in recent months – but that came after the market slid last year. The overall index shows a 4% year-on-year gain (see below). Apart from the spike in 2007, the trend in recent years doesn’t look excessive.

Figure 2. National Development and Reform Commission, house price index, year-on-year percentage change
Of course, different cities and different types of property have performed very differently. In Shenzhen, prices are up 15% year-on-year after being down 15% as recently as January (see below) – and that understates how big the swings have been at many developments.

Figure 3. National Development and Reform Commission, Shenzhen house price index, year-on-year percentage change
Overall, Shenzhen and some other major cities may look a bit frothy, for reasons I’ll look at later on. But it’s hard to make that case for the country as a whole.

Don’t rely on Chinese house-price-to-income measures

Another statistics that raises eyebrows is the house-price-to-income (HPI) ratio. This compares the price of the average property to the average income, which gives you an idea of how affordable property is.
In most developed markets the ratio tends to be in the region of three to five times. In Asia, five to seven times is typical. In China, it’s around nine, and much higher in many major cities.
Surely that’s evidence of a bubble? Not necessarily. If we look at the trend in China’s HPI ratio, we see something surprising: it’s actually been dropping in recent years (see chart below – note that this shows the current HPI ratio relative to 1998 and not the absolute value). That suggests Chinese property started off very expensive relative to income, but is now becoming cheaper. So what’s going on?

from - www.moneyweek.com