A bubble-prone housing market has been one of the most challenging sectors within the vast array of economic issues that China has faced on its road to economic modernization. One of the key approaches harnessed by policymakers in Beijing has been to limit property loans as a curb for speculative activity; however, questions remain as to the long-term feasibility of this solution to China’s property value crisis.To get more China property market news, you can visit shine news official website.

As China transitions from an agrarian society to a metropolitan-based consumption economy, Beijing has found itself locked in a constant battle to keep the rising property market in check. Beijing’s strict capital controls regime and strong-handed intervention in capital markets has left few attractive alternatives for Chinese investors outside of the domestic property market, while prevailing cultural expectations encourage young Chinese couples to buy homes and apartments before tying the knot. These two factors have significantly contributed to the market’s exponential growth over the past twenty years, tying up 78% of China’s wealth in real estate. A bubble is formed when demand sharply outstrips supply, which increases asset prices. As prices appreciate, speculators join the market and continue to push prices up.

Speculators then begin taking riskier and riskier measures to enter the market-by taking out loans at unrealistic premiums, for example-which quickly drive prices to a point at which they no longer reflect the real value of the underlying asset – all while injecting unsustainable risk into the market. Eventually, real demand begins to wane while speculative prices continue to rise, signifying the initial onset of a bubble burst. Due to the drastic economic impact of the pandemic, housing markets in many of China’s largest cities had relatively cooled off from 2019 figures. Yet, with China’s recovery, the housing market has once again begun to warm. Over recent months, housing prices in major cities from Beijing to Shenzhen have been ablaze with consumers purchasing property at record speeds. With the market approaching a similar bubble-like form as before the pandemic, concern has begun to grip at China’s financial sector.

The economic fallout of a bursting property market bubble would be catastrophic. A burst would lead to a sharp decline in property values, which would then send shockwaves through the financial industry as millions of Chinese investors trigger mass mortgage defaults. Additionally, China’s emerging middle class would be disproportionately affected, dealing a solid blow to a fragile Chinese economy that has relied on the consumer power and economic productivity of one of the most powerful economic classes in the world to emerge from the pandemic. While some argue that rising prices in the real estate market have coincided with growing household incomes and an overall increase in wealth creation among the Chinese population – and that there is no bubble in the market – these claims have been met with resounding criticism. Household debt has far outpaced income growth, with household debt-to-income ballooning to over 120% in 2019. With the pandemic spurring elevated unemployment figures and slowing income growth, this ratio is anticipated to continue growing more stark and place more pressure on lenders as the risk premium for borrowers grows.

Interestingly, the Chinese real market is unique in that it is defined by higher-than-normal down payments. While in many Western markets, down payments typically come in around 10-20% of the total property value, it is not uncommon to see down payments of 40-50% in Chinese real estate transactions. This has led to the assertion for some that a housing bubble is unlikely to arise given the lower debt-to-transaction price ratio, which acts as a lever of sorts for individuals from lower socio-economic classes to purchase properties at significant multiples of their household incomes and provide price support for high housing prices. However, with declining national savings rates, which clocked in at 44% at the end of 2019 – down 6% from its peak in 2010 – growing property prices are outpacing individuals’ ability to match the corresponding higher down payments. In turn, individuals must rely more on institutional lenders, who are either likely to reduce lending or offer loans at higher interest premiums given the lower overall liquidity of borrowers. The effects of these possibilities are likely to be felt via depressed demand for properties as the pool of potential buyers contracts. In an effort to cool the housing market to sustainable levels of growth, beginning in August 2020, the People’s Bank of China (PBOC) began addressing the apparent risks of a property bubble by releasing a policy that limits loans in the sector. The new regulations are targeted towards reducing access to credit for both developers and buyers, and, poignantly, have no expiration date. They are slated to stay in place until significant evidence of cooling is witnessed throughout the country’s property market and mandates that all would-be lenders in China decrease the quantity of loans that they offer to the industry. In theory, the policy is intended to provide a security blanket for lenders around the country to limit their risk exposure should any sudden spikes or shocks rattle the housing market, while also containing the ability for widespread real estate speculation. Yet, the policy comes with a cost. When the PBOC took similar measures during China’s last housing bubble scare from 2005-11, the policy was successful in its objective, albeit led to a material decline in national economic growth. Many economists now worry that the policy could hamper economic growth at a time of severe fragility for the world’s second largest economy and contribute to another period of economic decline as was witnessed from 2012-13. The basis for the new policy is formed by two key indicators: a concentration management system (CMS) and the PBOC’s “three red lines.”

The CMS limits the capitalization of financial institutions’ property-related lending based upon a five-tier scale and the three red lines – debt-to-equity, debt-to-cash, and debt-to-assets – and functions as a bulwark against high financial risk exposure for lenders within the housing sector. However, the CMS bears an unintended impact on property developers, and by extension, the broader economy. Property developers often rely heavily on bank loans to finance new projects and investments, which have now been complicated by PBOC aims to cap annual debt growth among developers to no more than 15%. This is likely to lead to heavy ramifications for the broader Chinese economy, as real estate – even excluding housing construction and some residential consumption – accounted for 7% of China’s total GDP in 2019, while other industries directly intersecting with the sector accounted for an additional 17.2%. Equally important, a 2020 report by Harvard and Tsinghua universities estimated that a 20 per cent drop in real-estate activity could lead to a 5-10 per cent fall in China’s GDP, all other things being equal. With real estate as such a prominent sector guiding China’s economy, any cascading effects on the major stakeholders in the market are certain to bear adverse impacts on the Chinese economy at large.