No Bubble in China's Real Estate

03/31/2010 1:00 pm EST

Focus: MARKETS

Yiannis Mostrous

Editor, The Capitalist Times

Yiannis Mostrous, editor of Silk Road Investor, says the Chinese economy and real estate market should keep growing through 2010.

Earlier this [month], China’s Premier Wen Jiabao [spoke to] the National People’s Congress (NPC), outlining the economic policies that China will follow in 2010.

The Chinese government projects that the economy will grow 8% this year—the same annual projection since 2005. The Chinese leadership believes that 8% growth is both sustainable and sufficient to maintain solid employment numbers and socioeconomic stability. Nevertheless, the Chinese economy could even touch 9% this year, provided that the developed economies do not relapse.

Finally, the Premier noted that “the government will resolutely curb the precipitous rise in house prices in some cities and satisfy people's basic need for housing." By focusing on housing prices rather than construction, the Chinese leadership clearly aims to satisfy the pent-up demand, while finding ways to moderate speculation and be more vigilant of illegal activities that artificially increase property values.

As talk regarding an imminent bubble in China real estate increases, I am reiterating the view that there’s room for further upside.

The Chinese government has traditionally been supportive of home ownership. In the late 1990s, authorities essentially transferred government-owned apartments to their occupants. After this move, the home ownership rate in China’s urban areas skyrocketed to 70% overnight.

The current leadership has taken a similarly supportive stance. Although the government has stepped in to cool the housing markets, expect authorities to do everything in their power to sustain the real estate cycle.

An increase in home ownership meshes with the government’s efforts to increase domestic consumption, as consumers must outfit their new homes [with] furniture, appliances, and other appurtenances. Even part of the increase in car sales can be attributed to new home purchases, as suburban homeowners prefer to ride to work in their cars. And the construction of new housing absorbs a portion of the work force that otherwise would be idle.   

It’s also important to note that 25% of all housing transactions are in cash. The rest of the market operates through mortgages, where the minimum down payment is 20%. Many new homebuyers put down 30% or even 40%.

Accordingly, China’s banks have a manageable, if not necessarily small, exposure to the property sector. In 2009, loans to real estate developers accounted for 6.3% of total outstanding loans, while mortgages accounted for 12%. The banking system’s total exposure to real estate loans is slightly north of 18%—not a large number by Chinese or international standards.

True, the average worker may be priced out of the downtown markets in China’s big cities, but many Chinese still can afford the higher downtown prices in the country’s cosmopolitan cities.

Because China’s leaders expand plans for urbanized growth in the so-called second- and third-tier cities, the housing sector should remain in growth mode for some time.

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