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Much has been said about China’s property market, especially with rising concerns of a Chinese hard landing. S&P has said property developers could face increasing liquidity pressure if sales continue to decline. Restrictions on home purchases have increased.But as talks of a Chinese property bubble continue, it is important to remember that there are significant differences between China’s property market and America’s.
First, household debt in China is less than 20% of China’s GDP. And unlike U.S., home buyers, the Chinese put down at least 40% of the purchase price, so a slight fluctuation in the economy wouldn’t wipe out their equity and wouldn’t result in banks seizing homes, according to Reuters.
While 22.5% of US properties are in negative equity, which is when borrowers owe more on their mortgage than their home is worth, home prices would have to fall over 40% in China for negative equity to become a major concern.
Beijing also raised the minimum down payment on second homes to 60%, from 50%. American lenders required no down payment during the housing boom. Moreover the collapse of America’s housing market coincided with an increase in unemployment and at a time when wages stalled. Wages are on the rise in China.
But there are many worrying signs.
As the Chinese government has tightened lending and placed restrictions on home purchases in 40 cities, new home sales have plummeted and developers risk defaulting on their loans.
Home sales have got so bad that China’s Golden Week of holidays, which is typically peak season for Chinese real estate, saw a slump in home sales. In Shanghai, Golden week sales were at their worst in the past six years. With only 398 units sold during the seven-day holiday, Shanghai saw an 80% decline in Golden Week property sales from last year. Meanwhile, property sales declined 23% year-over-year in Beijing.
Some developers even offered free electronics with home sales, and one developer in Nanjing tried a buy-one-house-get-one-apartment-free scheme, with little success.
Moreover, housing represents a larger share of the Chinese people assets. From Reuters:
The stock market has been extraordinarily volatile, capital markets are underdeveloped, and bank deposit rates are too low to compensate for rising inflation.
“The problem with China is that it tells people it doesn’t want them to invest in housing, but it doesn’t tell people what else to invest in,” said John Woods, chief Asian strategist at Citi Private Bank.
While the property sector accounts for only 12% of GDP, it has larger ramifications on the economy because it affects demand for steel, copper and other commodities. And there is the concern that another global recession could hit Chinese GDP growth, which has already been scaled back. And that would have major implications on the Chinese economy as investors opt out of Chinese property and push down prices.
Beijing which has been intervening in its property market for a while now is unlikely to let it get to such a stage. But concerns over Chinese property are well placed.