China’s housing market is making a comeback.
Prices are growing, in some cases by eye-watering amounts, with a sharp increase in housing loans helping to fuel the gains. Sales volumes, as as a result, are also picking up.
To some, after witnessing a similar debt-fueled boom-bust in Chinese stocks in mid-2015, the same outcome will eventually arrive for property, albeit with significantly greater financial, economic and social implications.
The bubble is building, and it’s only a matter of time until it bursts, they say.
While some many deem that to be a certainty, Raymond Yeung, Louis Lam and Kanika Bhatnagar, economists at ANZ, believe that whether it’s a bubble or not is just an academic debate, noting that “asset price bubbles are usually identified only with the benefit of hindsight”.
“In our view, we cannot simply regard a cyclical upturn in property prices as a sign of a real estate bubble,” the trio wrote on Wednesday.
Instead of labeling the property market a bubble, they believe the recent pickup in sales volumes is helping to reduce unsold housing inventory, laying the foundation for a further rally in prices over the medium to longer term.
A positive repercussion from the surge in property sales is that it has quickened the destocking process of China’s property market, and the turnover cycle has significantly narrowed.
By comparing the volume of property transactions and the level of inventory, we estimate that the existing turnover cycle is equivalent to 3.4 years of sales as of July 2016. This means it will take about 40.8 months to sell all of China’s housing stock at present.
However, the turnover cycle does not need to touch zero for the inventory adjustment process to end. We forecast the turnover cycle to drop to 2.1 years by the end of 2017, similar to the levels seen in early 2010, the year when China experienced a property boom. When the inventory level approaches the historical benchmark, we expect the real estate market to rally on a firmer footing.
This chart from ANZ shows China’s total housing inventory along with current inventory levels based off the current pace of sales. The dotted line is where ANZ thinks inventory levels are heading.
Certainly a view that not everyone will agree with, particularly given the recent recovery in the property market was driven by a sharp acceleration in housing debt with sales largely concentrated in only a handful of provinces.
Based on analysis from the ANZ, property sales in Guangdong, Jiangsu, Zhejiang, Shandong, and Shanghai accounted for 44% of the national total, compared with 41% a year ago. So the surge in sales volumes has been largely driven by select markets.
The chart below from ANZ shows were most property sales have occurred in the year to June. It plots year-on-year changes in property sales volumes versus changes in GDP growth. The bubble indicates the total number of sales, not which province had the most bubbalicious housing market.
Accompanying the surge in housing sales, housing loans also ballooned.
New mortgage debt surged by 112% year-on-year in the first half of 2016, accounting for 32% of all new loans issued. It now stands at 16.9 trillion yuan ($US2.53 trillion) with 24% of that total drawn in just the past 12 months.
According to ANZ, the narrowly-focused surge in mortgage debt is “a reasonable concern”, suggesting that it is increasing “both the inter-temporal and geographic concentration risk of banks’ mortgage loan books”.
However, Yeung, Lam and Bhatnagarthey believe policymakers have that risk covered.
“More local governments will likely implement property tightening measures. We also expect the PBoC to adopt macroprudential rules to manage real estate lending loan growth,” they wrote.
“Against the backdrop of ‘supply-side structural reform’, the central bank will refrain from deploying conventional easing tools (eg reserve requirement ratio cuts) in order to avoid sending the wrong signal to the property market.”
No bubble then, just future buoyancy for house prices. Given China’s importance to the global economy, most will hope ANZ’s call is right.
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