Monday,

October 17, 2016 at 8:59:40 AM India Standard Time

Subject:
Date:
From:
To:
BCC:

When a bubble is not a bubble

Monday, 17 October 2016 at 8:10:10 AM India Standard Time
Ashish Mago
undisclosed-recipients:;
d.sharma@vmart.co.in

When a bubble is not a bubble

Economist.com
ESTATE agents in China, as elsewhere in the world, are normally a smooth-talking, self-assured
bunch. But Liu Zhendong, a salesman at a large development in the northern reaches of
Shanghai, is afflicted by doubts. He had expected business to be solid and steady this year.
Instead, it has been manic, with clients jostling to see show apartments. Some had hoped to
wait for the market to cool, but capitulated and bought as prices climbed higher week after
week. Flats in the area, the once-rural village of Malu, still dotted with fields and scruffy
wholesale food markets, now cost 90% more than a year ago. It feels a bit like a bubble, he
says.
Mr Liu is in good company. Even the head of the central banks research bureau, usually cautious
in his choice of language, has said a property bubble must be stopped before it gets too big.
House prices have climbed by 16% nationwide over the past year, and double or even triple that
in big cities. So in the past two weeks more than 20 municipalities have tried to calm the market
downfor example, by requiring higher down-payments or limiting purchases by residents of
other cities.
As the past decade has shown, the ups and down of Chinas housing market are of global
significance. Totting up the property sectors impact on investment and consumption (all the
furniture and gizmos that fill new homes), it accounts for about a quarter of Chinese GDP. So this
years rebound has prompted both hope and dread. It has helped GDP growth stabilise at about
6.7%, faster than most analysts forecast in January (third-quarter data will be released on
October 19th). Stronger demand for iron ore and copper has given beleaguered miners a
measure of relief.
Optimism, however, has been tempered by concerns about the nature of the revival. Surveys
indicate that about one-fifth of buyers are investors rather than owner-occupiers. CEBM, a
research firm, estimates that this share rises to up to 60% in core districts of mid-sized cities.
Even more worrying has been the increase in property developers borrowing. Zhang Zhiwei of
Deutsche Bank says they face a prisoners dilemma: if too conservative, they will get squeezed
out of the market; so they choose to be aggressive. They have driven up land prices by 66% this
year, according to an index of 100 leading cities. Mr Zhang examined 252 of these land auctions
and concluded that two-fifths of winning bidders will lose money if house prices level out, let
Page 1 of 3

alone decline.
The
sharp
rise in
house
prices
also
seems
out of
kilter
with
the

broader economic picture. Income growth is slowing as the economy matures, making homes
steadily less affordable. That helps explain the frenzy in the market. During a holiday week at
the start of October, huge crowds swamped sales centres when new properties were put on the
market. In Shanghai, divorces have spiked as people take advantage of a loophole in
regulations. Couples can get a preferential mortgage rate only on their first home. Divorced
spouses can benefit by buying homes separately and then remarrying.
Such behaviour smacks of irrational exuberance, but caution is in order before delivering that
verdict. Investors, analysts and the press have been predicting Chinese real-estate Armageddon
for the better part of a decade. But there has been no nationwide crash. Prices have weakened
for a time, typically when the government clamps down on buying, only to take off again every
few years.
For all the signs of excess, officials have in fact done well to guard against the biggest potential
vulnerability: over-borrowing by homebuyers. Despite a recent surge in mortgage lending,
Page 2 of 3

household balance-sheets are on the whole in good shape. Moreover, strict down-payment rules
mean that buyers typically put up cash for as much as half the price of the home. Even if prices
fall, they are unlikely to walk away from their mortgage debt. This helps insure against the
downward spiral of foreclosures and falling prices that has wreaked havoc in other countries.
This is not to deny that the Chinese property market faces serious problems. But bubble may
be a misdiagnosis. The real pathology is a severe imbalance in land supply, argues Larry Hu of
Macquarie Securities. Smaller cities have plenty of land for building but shrinking populations.
Big cities, where people actually want to live and work, are sitting on large land banks but
releasing only small plots. Shanghai has about 1,800 sq km of farmland but sold only five sq km
for home-building last year. The result, predictably, has been soaring home prices.
Why not sell much more land in big cities? Doing so would fundamentally alter the rules of the
game, causing pain for lots of important players, Mr Hu argues. Governments in big cities count
on incremental land sales as a source of revenue; governments in small cities hope the
restrictions will eventually send people their way. This is, in other words, a political problem as
much as an economic one.
Mr Liu, the agent at the Malu development, knows both sides of the property market. A few
years ago he bought a flat in his home town of Jiuhuashan, a five-hour drive to the south-west.
It now gathers dust, empty except for a week during the Chinese New Year holiday, when he
returns home. Still young, he has no intention of moving back to Jiuhuashan permanently. The
mountains there are stunning but the economy sleepy. Rather, Mr Liu hopes to buy a home in
Shanghai eventually and has started saving up for it. The booming prices of the past year have
kept him busy at work, but pushed his dream ever further into the distance.

Ashish Mago
Founder & CEO
AM Consulting
p: 91-11-41013601/ 602 m: 9810337702
a: BMS Business Centre, 10, PVR Plaza Complex,
Connaught Circus, New Delhi-110001.
w: www.amconsulting.in e: ashishmago@amconsulting.in

Page 3 of 3