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Now here’s an interesting take on matters bubble, boom and bust in the role property investment plays in China’s surging growth.
Lombard Street Research made a succinct case on Tuesday for boom, not bubble:
China's massive monetary expansion has led to a boom in property prices, stoking fears of a property bubble. Bubbles burst and when that happens, the impact on the property market and output growth can be vicious. But a bubble is underpinned by an excessive accumulation of debt, while a boom is brought on by a mismatch between demand and supply. With a large part of Chinese investment in property being financed with savings, not borrowed money, and mortgage debt being a low share of output, it is more difficult to argue that China's property market is a bubble.
And here’s the case for Chinese property boom, over bubble, as made in numbers:
In 2009 Beijing engineered an unprecedented surge in China's broad money to the tune of 39% of GDP compared with a previous peak of 27% in 2003. But the rise in credit was less at 35% of GDP and not an outlier when compared with the 33% jump in 2002. Within the total, the increase in mortgage loans accounted for 15%.
LSR also picks an… interesting country comparison, given recent currency tensions:
Between 2000 and 2006 the increase in US mortgage credit averaged 46% of the total rise in credit. To start with total credit as a share of output in China at 148% is far below the US's 245%. The mortgage market is even more underdeveloped with mortgages only 14% of output compared with 71% in the US. Mortgage borrowing in China surged from zero in 1997 to 10% of GDP in 2004, as banks were allowed to lend for home purchase. But it then languished for five years despite expectations of a move towards a consumer-based expansion. True, mortgage credit jumped in 2009, but still remains at a low base. Housing demand in China over the course of last year has been driven by investment demand. Debt accumulation has played a big part, but on our rough and ready estimates only 60% of properties were bought with a mortgage.
Great! Now can someone please tell the Shanghai Composite Index.
As BusinessWeek reports, property developer stocks fell in Shanghai on Tuesday, after leading a 4.8 per cent slump in the index’s value on Monday. The FT ascribed the plunge to new government curbs on mortgage lending and home buying.
Here’s the damage in chart form — plus some colour from the front page of the Zhujiang Evening News (via Danwei) on Tuesday:
The Shanghai Composite Index last plumbed these depths in August 2009 — funnily enough in response to, er, restraints on property lending at the time, as BusinessWeek also reports.
In which case, it remains hard to tell what is bubble and what is boom in Chinese markets — what to make of the apparent consumer credit binge shown in data released last week, for instance, or the role of local governments in property lending.
Bubble or boom — either way, it’s fiendishly opaque to find out.
Related links: The Chinese property splurge, up close and personal – FT Alphaville JP Morgan Asset Management sees no bubbles in China - FT Alphaville Is China blowing bubbles? - FT Alphaville
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