China property risks

Implications: Chinese property markets have grown at a tremendous rate over the last 5 years and the government regulator has made great efforts to slow things down to more manageable levels. The implications of a Chinese property crash are unthinkable but not unimaginable and there have been many recent articles on the subject. It is important therefore to understand the background and the context before raising the alarm. This article notes the risks and gives a balanced view.

Analysis: The main impact of a Chinese property downturn will be on the homeowner and thus the consumer. This will affect the local economy and push China towards greater dependence on exports at a time when those export markets are themselves slowing. Also exposed are China's banks but with relatively high downpayments, generally of 30% or more, there is a 'comfortable' space before buyers find themselves in negative equity. Of course there is little real comfort in that should such a cushion ever be leant upon.

There is little evidence to suggest such a downturn is imminent. Despite the sometimes feisty rhetoric there is still plenty of space to grow for Chinese property prices. A relatively modest annual rate of increase for capital values of 15% would be equal to prices doubling over the next 5 years. This growth rate exceeds current economic growth but not greatly and even if a more modest 7 year period to double prices is used we are still only in line with economic growth rates.

Articles like this, and there are many of them, are useful to remind us of the risks. A property downturn in China is inevitable, there are no prizes for knowing that. The key issue is in the timing and understanding how to manage the implications. With little likelihood of an economic slowdown there is no prospect of a property downturn, thus todays buyers, like the banks, are cushioned by the prospect of several more years of growth before any unravelling comes onto the horizon.

The report is right to point out fraudulent mortgage applications but the process has improved over the last couple of years and such risks are being managed in a far tighter fashion.

So for now, it is business as usual for China's property markets.