Is the Chinese property market in trouble?
There can be few countries in the world which have experienced the kind of massive economic upturn that has taken place in China over the last decade. While looking to retain a core link with the country’s political and economic past there have been a number of Western type policies introduced to the mix as the government look to attract both foreign investment and foreign visitors.
These policies have worked to a large extent but now that the US led credit crunch is starting to hit home in China, the cracks are starting to show. Recent government actions and comments, at both local and national level have been welcomed, but can they make a difference? Can China turnaround and swim against the strengthening tide of economic woe around the world?
Background
China has always had the potential to be one of the powerhouses of the worldwide economy and this has started to show through over the last few years. Markets have been opened up to some extent, government policies have attracted overseas interest and the general wealth of China as a whole has increased substantially. The recent Olympic Games gave the country a chance to show the world it had changed and while there was some criticism of certain elements of the Chinese authorities, in general the games were a major success.
To see the strength of the Chinese economy you only need to look at the price of commodities over the last few years with steel in particular showing a massive rise in price as the Chinese economic revolution hit full speed. While it would be wrong to suggest that all areas of the country have benefitted to the same extent, there is no doubt that the wealth of the country itself has increased dramatically.
Local property markets
With a country as large and diverse as China there is a lot of emphasis put onto the local authorities of the various regions. As the property crisis in China continues to deepen we have seen local authorities introduce a number of initiatives to try and encourage greater demand in the local markets. This move has been taken up by 18 major countries across the country with the likes of Shanghai, Guangzhou, Hangzhou and Xi’an all taking a proactive stance in a difficult environment which has seen property prices fall in each of the last four months.
The measures under taken include subsidies for private homebuyers, tax cuts on house deeds, offers of permanent residency and an increase in the power of the country’s mortgage accumulation fund which takes contributions from employers and employees to reduce the overall cost of mortgages. These may not seem significant moves to those overseas but they have not been seen for many years in China and are very significant.
National government
It has been widely reported that the national government is also keeping a very close eye upon the housing market as there is a strong belief that any damage in this area will risk the short to medium term prosperity of the country. Let us not forget that this is a country where home ownership was unheard of twenty years ago, when household incomes have jump enormously over the last few years and where government is now encouraging the population to enter the property market.
Not only is much of the country’s industry tied to the property market, as well as a massive number of jobs, but many people have piled their personal wealth and future income into the property market. A substantial fall in the sector would have distasterous consequences for many areas of Chinese society and also alert international property investors that the old risks may still be there.
What next?
While it is unlikely that the national government will sit on their hands for much longer, much of the lead for the local markets will be taken from local government which will require significant financial backing for the authorities. So diverse is the country that what may work to revive a property market in one area of China may not work as well in another, hence the importance of local input.
It is also worth considering that many international investors have made significant investment in to China and many will be monitoring how the authorities handle their first real challenge of the modern age. China has moved on and is now a major player on the international scene but the length and depth of this current economic slowdown could make or break the country’s short to medium term future.
If overseas investors are not able to have confidence in how the economy is being run, and Chinese nationals see a significant drop in their wealth (due in the main to the fall in property prices) then a number of reasons to invest in the country could disappear. As much as they would like to disagree, China will never be a long term player on the international scene without international investment and real estate investment is a vital element of this.
Conclusion
While it would be easy to suggest that the historic might of China will be enough to pull it through the current economic downturn, the China of today is a very different animal to that of twenty years ago. International investment has mushroomed, the economy has reacted positively and real estate is very much a way of life for many in the country.
The consequences of an extended fall in the Chinese property market would be disastrous as much of the national and individual wealth of the nation is tied up in this sector. A debt laden population would have very little free cash to spend on luxuries such as cars, etc, which have all become popular in China and this would decimate what in many cases are still fairly new markets.
Due to the early stage of China’s move onto the international scene a significant economic downturn could well undo much of the good work which has been done in recent times and see local and international investors saddled with substantial financial losses.