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China Property Bubble to Burst ‘Quickly,’ Nomura Says

Workers on a construction site in Shanghai
Workers labor on a construction site for a residential development in Shanghai. Photographer: Qilai Shen/Bloomberg

The “bubble” in China’s property market is going to burst very quickly, with prices set to fall as much as 20 percent in the next 12 to 18 months, according to Nomura Holdings Inc.

National real-estate prices may drop between 10 percent and 20 percent on average, compared with an increase of about 22 percent last year, Sun Mingchun, a Hong Kong-based economist at Nomura, said in a Bloomberg Television interview.

“If you look at housing prices to disposable income in Beijing and Shanghai, they are 13, 14 times,” said Sun, whose team was ranked third in Institutional Investor’s 2010 Asian poll for China research. “There’s no way you can say there’s no bubble.”

Real-estate prices jumped 12.4 percent across 70 cities in May, adding to the 12.8 percent surge in April that was the most since the data series began in 2005. The gains suggest that measures ranging from a ban on loans for third-home purchases to higher mortgage rates and downpayment requirements for second-home purchases have yet to cool the real-estate market.

Stephen Roach, chairman of Morgan Stanley Asia Ltd., said the government’s measures are working “by all accounts.” China’s property boom isn’t a bubble because it’s supported by “solid” demand for residential housing, he said. While portions of the real-estate market such as high-end apartments are overheating, demand for homes will remain robust as rural Chinese migrate to bigger cities, he said in a radio interview from Hong Kong with Tom Keene on Bloomberg Surveillance.

Sliver of Boom

“This is just a sliver of the property boom,” Roach said, citing that each year since 2000, between 15 and 20 million people migrate to Beijing, Shanghai, and second- and third-tier cities in mainland China. That’s 2 1/2 New York Cities created annually, he said. “This underpins a huge demand for residential property. This property has not overheated and the demand for this property is very, very solid.”

The China Banking Regulatory Commission warned of growing credit risks in the nation’s real-estate industry and increasing pressures of non-performing loans. Risks associated with home mortgages are growing and a “chain effect” may reappear in real-estate development loans, according to its annual report published on its website yesterday.

China’s domestic stock markets have been closed for a three-day holiday since the start of the week. The Shanghai Composite Index has fallen 22 percent this year, the worst performer in Asia. A gauge tracking property stocks on the benchmark measure has declined 28 percent, the most among five industry groups.

The quality of bank loans may be better than data suggests because many of the debts are so-called local government loans that will be “taken care” of by the central administration, Nomura’s Sun said. Consumption growth will help drive the nation’s economy, he said.

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