Rising property prices lead to concerns of a similar asset bubble
As property prices in China continue to rise – frustrating government efforts to rein them in – some analysts are concerned that China may end up with a Japanese-style asset bubble, which kept growing in the ’80s before it burst with painful consequences for the economy.
The analysts noted that China’s property market seemed to be fuelled by low interest rates – the same driver that distorted the Japanese market slightly more than two decades ago.
In a recent speech at a National University of Singapore forum, Mr Fan Yifei, executive vice-president of China’s sovereign wealth fund China Investment Corporation, drew parallels between the frothy real-estate market in today’s China and the real-estate mania that had gripped Japan in the late ’80s.
Said Mr Fan: “With low real interest rates, people tend to sell less and invest more, which forces liquidity into the asset market, including property, equity and agricultural products.”
Japan’s real-estate bubble was a result of buyers speculating on commercial properties with cheap credit. In China, the speculation is centred on residential real estate.
From 1985 to 1991, mortgage lending for commercial property accounted for 50 per cent of Japan’s gross domestic product (GDP).
Similarly, between 2003 and 2009, home loans accounted for 40 per cent of Chinese GDP. Last year, bank lending in China totalled 7.95 trillion yuan (US$1.2 billion), exceeding the official target of 7.5 trillion yuan.
This deluge of credit is pushing property prices higher. In major Chinese cities, home prices rose 6.4 per cent from a year earlier in December – the 19th straight month of gains.
The Chinese government is aware of the risks to the economy from an overheated property market: Recently, the authorities in Beijing introduced yet another round of measures to chase away speculators and ward off asset-price inflation.
Second-time home buyers will be required by banks to pay 60 per cent of the price upfront, compared with a 50-per-cent downpayment previously. Those buying second homes will also be charged higher interest rates.
Separately, Shanghai and Chongqing also introduced an annual property tax on high-end homes between 0.4 per cent and 1.2 per cent.
According to a study published by Bank of Japan researchers last year, a key difference between China’s predicament and Japan’s in the ’80s is in the level of urbanisation. This is still much lower in China now than it was in Japan 20 years ago – suggesting more scope for genuine housing demand in Chinese cities.
Other experts also pointed out that China’s new wave of prosperity, unleashed by very rapid economic growth and job creation, has spurred demand for property. In contrast, Japan’s economic growth in the ’80s had already slowed down to between 3 per cent and 4 per cent.
Overvaluation was also much more pronounced in Japan in the late ’80s – home prices in central Tokyo averaged 17 times the national average salary – than it is in China today, noted Templeton Global Equity Group chief investment officer Gary Motyl.
He added: “If you can contain the inflation situation, if you can contain the property price bubble you can still be in pretty good shape in China.”
Source : Today – 7 Feb 2011