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Workers demolishing illegal construction on a rooftop in Beijing.
Is there a property bubble in China, and would it pop like the ones in Japan and the U.S.?
China’s housing sector is in terrible shape, says a new report by Goldman Sachs . But even if the market were to collapse, the consequences may not be as bad as they were for housing busts in the U.S. and Japan.
The housing market in China saw a boom following the global financial crisis, with home price more than quadrupling between 2005 and 2013. But in recent years, real-estate enthusiasm led to rising leverage and ballooning levels of inventories that led to ghost towns in many parts the country.
“China has clear signs of ‘froth,’ if not a bubble, in housing,” says Goldman Sachs. It looks reminiscent of the bubbles in Japan in the early 1990s and the U.S. from 2006 to 2010, it says—and finds China might turn out differently.
Housing bubbles typically have four factors in common, Goldmans’s report says. First, prices increased dramatically relative to fundamentals. Second, expectations of future prices became unrealistic. Third, credit growth mushrooms, fueled by easy monetary policy and regulatory gaps. Finally, in the late stages, the supply of property booms.
China is at a much earlier stage of urbanization compared to Japan in 1990 and the U.S. in 2006. China passed the 50% mark in 2012, and the shrinking household size and the continued need to replace shabby shelters would likely continue to drive demand for homes.
Like the other two countries, there has been rapid credit growth in China. But the rising debt levels were among builders and local governments, not buyers. The U.S. housing crisis was characterized by loose lending standards for consumers, with many unqualified borrowers taking on too much debt and relying on mortgage products with teaser rates.
“The story in the Chinese mortgage market is entirely different,” says the report.
Then there’s the fact that China’s homeowners have more skin in the game. First-time home buyers have to pay a minimum 30% down payment. Buyers of second homes have to pay 60%. Furthermore, Chinese households have lower debt levels compared to the U.S. households, with 18% having mortgage debt compared to 49% in the U.S., said the report.
“Low household leverage suggests that there is room for policy makers to use credit availability to dial up housing demand if needed (though at the potential cost of demand in future years),” says the report.
In the near term, high and rising levels of inventory would still weigh down construction activity, says the report. Recent measures by the central bank to loosen mortgage rules – allowing more home buyers to qualify for cheaper down payments – would help, and there are more tools that policy makers could use to avert a sharp downturn.
Beijing’s leaders could ease mortgage-lending conditions further and defer regulatory actions that might dry up investment demand, such as the rollout of property taxes. They can also boost construction activity via infrastructure spending. If default risks among developers rise too quickly, they can provide liquidity to minimize any spillover effects.
However, in practice, Beijing faces more constraints in calibrating a soft landing, says the report. It has an incentive to keep curbs on China’s massive shadow-banking system to limit future excesses in construction. At the same time, as economic growth slows, China will also be tempted to support demand.
–Esther Fung. Follow her on Twitter @estherfung