China's house price bubble may burst in 2012

Could 2012 Spell the End for the Chinese Real Estate Bubble?

The Chinese real estate market has been booming for the past decade and in recent years the estimated property value has surpassed the GDP, leading many to question the sustainability and strength of the market. Consequences of a real estate bubble burst would be damaging not only to the economy, from both a local and global perspective, but to the entire property market in general. For these reasons an understanding of the dynamics of the market, in particular the implications of overvalued property and the consequences of a burst bubble are being taken very seriously by financial and Government entities alike.

Real estate is an incredibly complicated and cyclical market, and one where the rise and fall of prices is unpredictable and can have drastic effects on the wider economy. In the particular case of China, many of the complexities of the market have been simplified in the boom years of the past decade. To some degree the current property values appear to ignore the macroeconomic data and fundamentals and rely most heavily on the prices that buyers are willing to pay. In a market where prices are well above the estimated rental incomes and general market value, the suggestion that an economic bubble has been created is easy to understand.

A real estate bubble occurs when market values become significantly overvalued and the prices that are reached are not commensurate with the actual value of the asset or its earning potential. Properly identified, an economic bubble offers a warning that prices are unsustainable and priced too high. With prices far exceeding the estimated rental incomes and no signs of an imminent correction in the current market, it is possible to conclude that the whole market is to some degree, overvalued.

Masked by its sheer financial importance, the rate of price inflation in the segment of the market aimed at the wealthier has been extreme. For example, prices of luxury properties in key business centres have quadrupled or better since around 2001. Generally, prices have outstripped local incomes and major Chinese cities have been reporting average house prices far higher than what is affordable for the average buyer.

Given the sustained rise in prices since 2001, and the concerning signs of a bursting market, there is speculation that in 2012 the Chinese real estate bubble could finally burst. If there is a significant decline in the property market, then it could have substantial financial and political ramifications. There is widespread concern that if the bubble shakes itself free then there would be a decline in domestic spending which could lead to an immediate decrease in the GDP growth rate.

The Chinese Central Government has already tried to actively cool the rate of growth in the property market. After permitting an inadequate response on the part of local Governments, Beijing has now moved to increase the severity of restrictions - suggesting a systemic recognition of the problem and responsibility of the Central Government to take action.

The General Administration of the Peoples Bank of China (PBOC) has further implemented a series of restrictions to control the rise of prices. These have included restrictions on second home buying in major cities, tighter mortgage requirements and other measures to prevent the sale and flipping of property for shorter terms and for fast profits. With steady progress being made in controlling the issue, it does appear that the Chinese Government is taking the necessary steps to prepare for the eventual correction of the market, as well as any financial repercussions that may arise from a market correction.

If the bubble does in fact burst then the consequences could be wide ranging and painful to the economy. One of the most immediate and obvious results would be an extreme reduction in consumer confidence. As consumer confidence drops, the willingness to invest, and to invest large amounts, would also be diminished greatly. This could have a severe impact on the macro and micro-economic levels of China and further have wider global financial implications.

Also, a rapid rise in unemployment is another possible consequence of a market correction. Many recent immigrants have purchased real estate and taken up jobs in the retail sector, due to the exaggerated wages, as such a market correction would trigger a higher unemployment rate. In addition to a surge in unemployment, the amount of bank debt would increase due to the lack of payments, putting even more pressure on the banking sector.

In order to prevent a massive correction in the market the Chinese Government has introduced housing affordability schemes and special lending policies to help reduce the financial burden from property owners and stimulate the market. The focus of these schemes has been to ensure the stability of the economy and to reduce the risk of a severe fall in prices.

The Chinese real estate market is complex and unpredictable and the potential repercussions, if the bubble were to burst, could have serious ramifications domestically and internationally. While there are several attempts to help improve affordability and reduce the risk of a full blown correction in the market, the evidence does suggest that a real estate bubble has been created and declines could become more likely in 2012. In the event of a real estate bubble burst, the damage to the wider economy and to the market in general could be significant. For this reason the Chinese Central Government has taken preventative steps and is bracing itself for the possibility of a full blown correction in the near future.

Chinas housing bubble has been causing great concern for the economy since 2013, with prices in some cities soaring beyond affordability. The bubble is predicted to burst in 2012 as policy makers turn away from measures which have supported housing prices in the past and focus instead on curbing the economic expansion and increasing liquidity.

Recently, policy makers have announced interest rate cuts and responded to slowing economic indicators by increasing liquidity, a key factor in driving up property prices in China. This suggests that policy makers are keen to avoid a bursting of the housing bubble in 2012.

However, analysts are still predicting that the bubble will burst in 2012, citing weak sentiment in the property market, increasing levels of household debt, and increasing levels of mortgage defaults as cause for concern. The Chinese government has also begun to implement a number of measures in an attempt to rein in speculation and discourage investment in the property market. These include raising the minimum down payment requirement for second and third home purchases, raising mortgage rates, and reducing access to easy credit.

Furthermore, the state of the global economy may also play a role in the burst of the property bubble. As the global economy weakens and the value of the yuan falls, Chinese real estate investors may be more likely to withdraw their investments and put their money elsewhere.

Regardless of the factors that may play a role in the burst of the bubble, what is certain is that its effects will be felt across the Chinese economy. A bust would mean that those who have invested in property will suffer heavy losses, putting further strain on household finances and impacting on other areas of the economy such as banking, construction and retailing.

However, the burst of the housing bubble doesnt signal the end of the economy. The Chinese government is taking measures to strengthen the economy and manage the impact of the bust, and the housing market will eventually stabilize once again. The key to the future of the Chinese economy is to be prepared for the inevitable and mitigate the effects of the bursting of the bubble.