Property bubbles can have serious consequences on a nation’s economy as recent experience in Ireland and Spain have highlighted. Investors (or the good folk who actually buy a home to live in it) can find that the current market value of their asset is a fraction of the price they paid for it, leaving them with the dreaded “negative equity”. Banks can end up holding the bag on loans to individuals and property developers which the borrower has no realistic chance of repaying (Spain and Ireland) and construction projects freeze because projected profits can’t possibly be made and buying appetite in a falling market is notoriously thin.
China is the world’s second largest economy and both the authorities and external observers are concerned that a housing bubble is inflating that could have catastrophic consequences if/when it bursts.
The most recent statistics suggest that the house price increase has “eased” to 9.6% year-on-year from a figure of 9.9% the previous month. The average rise is based on data for 70 cities and is the first such easing seen for 14 months. Property investment is popular in China (for those with the resources) and is worth roughly 12% of GDP. The central bank rate hovers at about 6% and the weighted average interest rate on mortgages is 6.29% - so the investment appeal is immediately evident.
There is also suspicion that China has underestimated the rise in property values, especially in major cities such as Beijing and Shanghai with disparities evident between official sources. The Average Selling Price Index suggests that prices in the capital increased by 50% between 2006 and 2010, whereas the 70-City Index has the increase at 120% - external economists suggest that the true rise in property over this time frame is closer to 250%.
The government has attempted to stem the speculative property price hike by constraining the financial sector, by requiring banks to hold more liquid reserves, for instance. The idea being that this will restrict cash flows available for the purchase of properties, but the continuing price rise suggests that this has not been altogether effective.