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China Property Bubble Pop Wont Derail Economy

News Posted On: 02 July 2010

The well respected publication Motley Fool has just published an analysis piece that puts the Chinese property bubble in a new light for many.

According to the panellists from Global Gains, while a correction in the market is likely -- if not inevitable --, that such a correction will not do any serious damage to the Chinese economy and therefore to the global recovery.

They make a pretty powerful case: it is true that the massive growth in the Chinese property market is unsustainable, and that every massive increase in prices, by pricing more and more first time buyers out of the market, makes a correction more and more inevitable.

But, they say, the government's measures, like forcing 50% minimum down-payments on second home purchases, will prevent this from causing a meltdown, because more of the speculation fuelled purchases are coming from people's savings and not from bank balance sheets.

There is one problem with this: -- and that is not the assumption that many second home buyers will work the system to avoid the down payment -- the number of first home buyers buying on credit a home that may plunge them into negative equity when the inevitable correction does come. At the same time jobs will start being lost in estate agents and developers, and the chances of remortgaging will be lax.

So, it is true that the Chinese economy is probably strong enough to withstand such a scenario, but this will end up being bad news for the property market. Because if the economy doesn't suffer from the property market crash, there will be no stimulus, no low interest rates, and no relief. In fact a correction is what the government measures are aiming for, so they are even less likely to set about stimulating growth.

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