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Monday, October 24, 2016, 22:15

Experts play down property bubble fears on the mainland

By Oswald Chan
Experts play down property bubble fears on the mainland
A residential construction site in Shenzhen. Homes prices in August rose in 64 of 70 major Chinese mainland cities tracked by the National Bureau of Statistics — up from 51 in the previous month. Some experts believe that property prices in first-tier mainland cities still have potential to climb further given the strong fundamentals. (Shen Qilai / Bloomberg)

Soaring property prices on the Chinese mainland do not mean there’s a risk of a nationwide housing bubble, but potential risks in larger cities may caused spillover effects on the financial sector, according to global real estate advisory firms and investment banks.

Apartment prices jumped 28 percent year-on-year in the four first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen in August. Nationwide homes sales also climbed 28 percent from January to August as average prices grew by more than 7 percent, fuelling fears of another property bubble.

Homes prices in August rose in 64 of the 70 cities tracked by the National Bureau of Statistics — up from 51 in the previous month.

Worries about a property bubble have led the authorities to apply the brakes on the housing sector. Earlier this month, some cities tightened rules on housing purchases and mortgage payment levels, as cities like Shenzhen and Shanghai saw price increases of more than 30 percent from a year ago.

“A collapse in the property sector would disrupt social stability on the mainland, and the central government will not let this happen,” property investment advisory firm CBRE’s head of Asia Pacific research Henry Chin said.

“There are some property bubble risks in lower-tier cities as housing inventories there pile up, but there’s no risk of a nationwide property market bubble.”

Chin said more Chinese residents are looking for more diversified investment opportunities with the continued opening-up of the country’s capital account.

“Homes prices in first-tier mainland cities still have potential to go up further given the good fundamentals,” he said.

The connectivity of cities, especially the development of high speed rail, is also becoming an important factor for the property market, according to a survey by the Urban Land Institute (ULI) — a non-profit research body.

“As the construction of high-speed rail networks link up more first-tier and second-tier cities with peripheral areas more seamlessly, this allures more institutional investors to study the investment potential of properties located in second-tier cities unleashed by the high-speed train connectivity,” said Kenneth Rhee, ULI chief representative for the Chinese mainland.

He said the survey, which interviewed 121 representatives from real estate companies to gauge the business prospects of the property sector in 33 mainland cities, found that better economic policies by the central government, increased productivity and urbanization are setting the scene for the property industry.

A report by property advisory firm Cushman & Wakefield concluded that Chinese mainland cities are the most attractive for investment in development sites, with Beijing and Shanghai taking the top two spots, followed by Nanjing, Hangzhou and Chongqing. Ten mainland cities contributed to more than $177.7 billion in investment from the third quarter of last year to the second quarter of 2016.

Other than skyrocketing homes prices, another major concern is that falling property prices will exacerbate the negative spillover effects due to leverage building up in the financial system.

However, both HSBC and Morgan Stanley have dismissed such fears, saying that although homes affordability is stretched in first-tier cities, it remains far healthier in second-tier and other lower-tier cities.

“Homes prices have risen to about 16 times of disposable income in the four first-tier cities, triggering fears of a bubble. Second-tier cities and nationwide valuations have inched up slightly, but remain well below the peak level recorded in 2009-10. Housing affordability in third-tier and lower-tier cities has, in fact, continued to improve, with income growth outpacing homes price appreciation,” Morgan Stanley said in an economic research report.

Charade Poon, a director at real estate investment firm advisory firm M3 Capital Partners (HK), agreed that the mainland housing market is in the stage of polarization.

“Traditional developers and financial institutional developers are still bullish for first-tier cities because there’s market liquidity there. However, for second-tier cities, the property market is challenging — hence we see polarization between first-tier and second-tier cities,” he said.

According to Bloomberg data, average homes prices in second-tier cities have only inched slightly upwards, with those in some lower-tier cities remaining stagnant or even experiencing declines.

Wang Tao, head of China economic research at Swiss investment bank UBS, agreed.

“(Homes) construction recovery will be sustained in the next few months but will weaken in 2017 as sales decelerate and policy tightens somewhat, with developers staying cautious given the high existing and potential inventories in most lower-tier cities,” she said.

AXA Investment Mangers (IM) — the asset management arm of French insurer AXA — is worried that the financial spillover effects are the biggest risk of a severe housing-market correction on the mainland.

“If the correction is not properly managed, fears of a market collapse could become self-filling via fire sales of properties. This could create a downward spiral in homes prices, reigniting fears of macro instability and economic hard landing, resulting in a synchronized sell-off across housing, equities, commodities and the renminbi,” warned AXA IM’s senior emerging Asia economist Aidan Yao.
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