By Anthony Harrington
In June, Naked Capitalism posted a blog asking if the Chinese real estate bubble was finally imploding. We’re now in August and the impending implosion is still impending. Frankly, I wouldn’t hold my breath. It might still happen, but according to property specialists DTZ, there are some key statistics about the Chinese property market that inveterate China shorters like Jim Chanos and economists like Michael Pettis (both cited in the Naked Capitalism blog) have overlooked.
DTZ concedes that average nominal house price growth in China has exceeded inflation over the last decade. The average growth in house prices over that period was 5.4% versus average inflation of 1.9%. This is not the kind of year-on-year average growth normally associated with out-of-control bubbles. You’d generally be looking for growth well north of 10% for that. But this is just my observation and has nothing to do with the point that DTZ wants to go on to make in its briefing note on China’s housing market. (Incidentally, this briefing note is not new; it has been out since July 2010 and has been ignored for about that long too.) What DTZ wants to bring home to people is that if you look at long-term affordability trends, which is what housing experts like to look at when trying to decide if they are looking at a bubble or not, then there is no housing bubble on mainland China – not even in its Tier One cities.
The affordability trend across most Chinese cities has improved in the past 10 years, as nominal household income growth has been 11.4% on average annually over the 2000-09 period, more than double the house price growth (5.4%) over the same period. Despite this long-term trend, affordability in Beijing and Shanghai has worsened slightly recently. Compared to other countries, the Chinese house price affordability trend has been very favorable over the last decade.
Not much ambiguity about that statement. No bubble, period. Not if you look at affordability as the driver. In addition, as Hans Vrenzen, head of global research at DTZ, points out, the Chinese government can do things to quieten down a property bubble that no government in a democracy could even dream of. Try this as an example: Concerned about rising house prices, the Chinese government decreed that no Chinese citizen would be able henceforth to buy a second or a third home. Bang goes the second home market and in an instant a significant chunk of demand vanishes from the property market. All that speculative property buying that fuelled the upswing, for example, in the UK or -- more to the point -- in the US sub-prime bubble could have been removed with a stroke of the pen if our politicians had had that kind of power.
This is apart from the fact that the Chinese government also has its hands quite firmly on the ordinary levers of policy control, such as loan-to-value ratios, which it can reset at its pleasure. These tools are available, though perhaps not as directly, to western economies as well, although not necessarily to their politicians, since these levers are in the hands of central banks -- which are supposed to be independent of governments. Not in China, of course; it doesn’t work that way there.