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Chinese Property Prices Are Falling

News Posted On: 08 September 2014

Most of us can remember back ten years to when every magazine in the newsagents carried banner headlines about China’s blistering 30-plus percent economic growth, or advising their readers to learn Mandarin (still good advice). On top of that explosion the Chinese built a real estate market that seemed the envy of the world – yet it may yet turn out to be a bubble on a truly Chinese scale.

Inexperienced developers built whole cities where no-one wanted to live, and inexperienced investors bought property there, fueling economic growth but seldom leading to good returns for the individual. Now, as Chinese investors and buyers increasingly turn away from their native market to other Asian countries, to Europe and to the USA, the Chinese market has done what everyone has been forecasting for years, but no-one really believed would happen.

It hasn’t just slowed down, or corrected, or adjusted, or stopped growing.

It’s begun to fall.

Average new home prices fell by 0.9% in July month on month, following a 0.5% decrease in June.

While that isn’t a precipitous drop by most standards, for China it’s a nosedive, for two reasons: first, because it contrasts with one of the world’s most rapid growth rates, and second because it’s China’s first ever correction.

The Chinese market grew 500% between 2008 and 2014 – that’s not a misprint: prices quintupled in a 6-year period. 15 years ago, Chinese couldn’t own housing – it was all state-owned. Move on to the present and today’ Chinese homeowners have never known any other housing market than one characterized by meteoric rise – and neither has the country’s first ever generation of property investors.

But that meteoric rise was starting to look unsustainable even a few years ago. We weren’t the first to remark that building huge ghost cities that might never be inhabited wasn’t a great way to build a stable future for a property market, and China’s exceptionalism is the only reason more voices weren’t crying ‘bubble’ sooner.

Chinese property is among the world’s most expensive as a proportion of household income. Chinese credit is 2.5 times the size of its GDP – which compares well to the USA, whose debt is 2.7 times GDP, but China amassed this entire burden in just 15 years. Most of it has happened during the last 5 years – China’s debt has expanded by 150% since 2009. Rapid build-up of a debt like that is a key sign that the whole economy may be in trouble.

And that’s the rub: China sought to cool its overheated housing market but without the housing market, up to 20% of Chinese economic growth is going or gone. The housing market and associated businesses – construction and retail, yes, but also cement and steel, chemicals and furniture, and other support industries – make up a full fifth of China’s economy – compared to about 4% of the economy of the USA.

China’s problems look serious enough that the big worry is what happens if they spread to Europe and the US. Housing in both areas has benefitted from Chinese investment that may no longer be forthcoming, while economic decline in China could combine with drought in the US and friction with Russia to trip up the still-nascent recovery.

Written by Les Calvert of www.property-abroad.com - overseas property reporter

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