The Reserve Bank of Australia, like others, has expressed concern about the recent rebound in China’s residential property market, suggesting that there are growing doubts “about the sustainability of the recovery, particularly for investment”.
“Housing price inflation has risen, sales (measured as residential floor space sold) have grown rapidly and housing investment has strengthened after a period of weakness,” said the bank in its quarterly Statement on Monetary Policy.
“Government policy has played an important role in Chinese housing market cycles and a range of stimulus measures implemented since 2014 has contributed to the latest strengthening of conditions.
“These policies have encouraged purchases of housing with the goal of reducing inventory levels, which have been high in many parts of the country,” it added.
While Chinese authorities are attempting to reduce ballooning inventory levels, particularly in smaller second and third-tier cities, the RBA suggests that they may be attempting to solve one problem by creating another.
Following these earlier stimulatory measures, housing credit has grown rapidly, rising by more than 30 per cent over the year to June 2016. Housing credit has also increased sharply relative to the value of property sales, suggesting that buyers are using more leverage to purchase property. Investor demand for housing appears to have contributed to the recent strength in many local housing markets. One likely reason for this is the perceived lack of alternative high-yielding investments, particularly given the unwinding of the equity market boom and declines in yields on wealth management products since mid 2015.
Echoing the boom-bust scenarios seen in other Chinese assets classes — most famously the stock market in recent years — the RBA notes that “given the large stock of unsold properties nationally, any slowing in demand from current levels would pose potential risks for property developers and upstream suppliers of raw materials to residential construction.”
Relaxed lending standards, potentially raising the spectre of an increase in loan defaults, are also leading to an increase in financial stability risks, notes the bank.
“Housing credit has been rising rapidly, and the recent upswing has been accompanied by reports of less creditworthy borrowers entering the housing market by obtaining credit through informal channels (such as peer-to-peer lending) to finance down payments,” says the RBA.
“This raises both the risk of loan defaults and the potential size of any financial losses in the event that prices fall significantly.”
Although risks appear to be building on numerous fronts, the RBA suggests that the ability of municipal governments to introduce policies targeted to local conditions “could help mitigate the risk of extreme fluctuations in regional housing markets.”
Though no one knows quite how the credit-fueled housing recovery will end, the risks are clearly there — not only for Chinese homeowners and developers but also those supplying the raw materials being used in the construction upswing.