China Housing Bubble

The Chinese economy is one of the fastest growing economies in history and they have excelled by throwing tons of resources into modernizing their economy. Real estate is a foundation of China’s phenomenal growth record in the past two decades with property construction alone accounting for 13% of GDP in 2010.

The health of the economy is crucial to China’s construction, steel and cement sectors. Chinese growth has a positive effect on the Australia economy whom we are China’s biggest provider in raw materials of iron ore and minerals, so when the Australian economy booms, then Australia cashes in. However, the fundamental concern is that the Chinese economy is facing a housing bubble, which could detrimentally affect their economy as well as ours.

For decades, China’s economy has been rapidly growing with the help of the construction and real estate markets. The government has often directed the cash into massive infrastructure projects or favored industries in order to keep the economy booming. However, China’s economy has hit a brick wall and is slowing down fast.

With more than 20 construction projects beginning each year, developers and investors have been sinking their hard earned generations of cash into the Chinese market to help fund these projects, this saw a huge increase in the demand for these newly developed properties. With the Government implementing a one-property per family in the major cities and allowing for families to buy their own homes, this saw the demand of properties sky rocket with medium-income earners looking to set up a healthy nest egg for their future generations.

With the property market on the rapid incline, the Chinese saw this as the perfect opportunity to make a profitable margin, as the property market has been able to provide substantial returns than a bank deposit would. This made unprecedented history and demand for the Chinese real estate continued to grow and developers and investors continued to build more and more infrastructure and housing properties.

The idea behind many of the concrete jungle cities was so that the Chinese government could accommodate the urbanized population, however, in cities like Mongolia the population surrounding these cities are living on less than $2 a day and with the demand in real estate increasing the inflation of property prices, the average-family has no chance of ever purchasing an apartment to live in.

All the developments have been purchased by those who have sufficient savings and are looking at investing, however, they are all uninhabited as the average family cannot afford the rent or to purchase a property since they cost upwards of 50-60,000.

The developers have created cities, shopping malls and financial districts, all which have been partially completed and are all uninhabited because they built too much infrastructure too quickly for the non-existent supply to feed non-existent demand. Many projects have not been completed as the developers have supposedly run out of cash and there are huge loans at stake, which could fall through any minute since there is no demand for the actual infrastructure being built.

The biggest concern is that this bubble could ultimately burst any minute and all those medium-income earnings and above who have sunk their nest eggs into multiple dwellings will see this disappear as social unrest develops and prices of those properties fall. Since inflation has inflated the process of demand, the supply is overstated and now the prices of a dwelling are 45 times the average disposable income.

China is Australia’s biggest customer in providing raw materials of iron ore and minerals so when the economy booms, Australia cashes in. This revolution has been brewing for some time and China was determined to ensure that their economy remained on top. With the population rising, the Government saw a need to pump as much money into infrastructure and housing estates to try and move people out of the big cities.

During the GFC, China kept the Australian economy afloat with their need for our natural minerals and iron ore. The peak of the bubble was during the GFC crisis were China continued to need the resources of Australia

If the bubble is expected to burst, then this could potentially put the Australian economy at risk as employees would be made redundant in the mining industry as the demand for our goods are no longer at increasing levels. Therefore, these thousands of employees will be left jobless, thus increasing the unemployment rate and they will be left with minimal disposable income with potentially high mortgages since these workers had no reason to believe that they were going to be jobless.

Therefore, most likely, their expenses would be exceeding their income and they could default of their loan. Having said that, if there is less demand for Australia’s resources, there will be tightening budgets and therefore, the aggregate consumption of Australians would depreciate, resulting in less consumer spending and low collateral value.

In the event of the Chinese’s housing bubble bursting, the private investors will not be protected and could potentially lose their investment. A bubble burst could result in the cash rate being reduced from the already low rate of 2.75% with commodity prices declining and inflation would also be eased as well as monetary policy.

In recent news, Beijing announced that the economy grew by 7.7% in the first quarter, below the 8 percent predicted which is bad news for the Australian economy, with China taking more than 30% of Australian exports. GDP underperforming for the first half of the year at 20.9% compared with 21.2% in the first two months. With that in mind, China has seen industrial output at 8.9% compared to the estimate of 10.1%. The key reasons behind these falling figures is weak exports and weaker domestic spending in part because of the tighter rules on government spending.

There is growing concern about the massive amount of loans from all the generated growth both existing and being pumped into the system could cause a potential crisis for the Chinese economy. So with growth of China slowing, our commodity prices decline, however, our supply of resources would be on the rise due to the amount of investments taking during the boom. With iron ore prices hitting hard, it means problems for our two biggest miners BHP and RIO

However, the upside to this is that the Australian dollar has been sliding, which is good news for the Australian manufacturers who have survived the high Australian dollar. This means that Australian investments are an attractive source of cash flow – especially from China – as assets become cheaper.

If China’s economic growth falls below 7%, this could mean a real reality check for the Australian economy, however, if growth rebalances itself and opens up its economy, it will help Australia rebalance its own economy away from its over-reliance on mining and boost services like health and finance

Chinese employment is stable and this is a basic indicator of China’s economic stability. With revenues rising 61.3 percent, this adds to the worries of unattainable housing price boom

Home prices have spiked 8 % and since China measures GDP on what is built, unlike the U.S. who measures growth on what is bought and cold, the pressure has been put on the ghost cities, which are currently vacant.

Idea for Chinese government is to introduce a property tax, which would reduce speculation, discourage owners from holding empty flats and provide a fresh source of funding for cash-strapped local governments. China’s real exchange rate is 33% overvalued and with high interest rates in the Chinese economy, real estate becomes more vulnerable with high interest rates.

The government is implementing overheated crackdown on property prices for its major cities and implement a tax for second home-buyers in areas where property prices are rising too quickly.

Rental yields are low and have been falling since 2008 and with more than 50 million houses unoccupied, this is worrying.

The government is looking at ways in which it can reduce property prices in a way that economic growth won’t be undermined. The Chinese government has implemented actions making it harder to get a second mortgage as well as raising the down payment for a second mortgage to make it harder to obtain to 60 percent from 40 percent.