Trouble building

The Big Risk in China Isn't Stocks

Cracks are appearing in the 13-year-long housing rally.
Qilai Shen/Bloomberg
CREDIT SUISSE GROUP AG-REG
-0.11
As of 10:49 AM EDT
15.02 CHF

While all eyes are on China's stocks rout after the U.S. swoon, there's a troubled sector that's garnering fewer headlines but will have broader reverberations -- real estate.

Chinese property stocks slumped last week, dragged down not just by the global sell-off but by worries this may be the year when housing finally takes a hit.

Under Pressure

After outperforming most of this year, China's property stocks were hit hard in last week's rout

Source: Bloomberg

To date, Beijing's crackdown on risk amid soaring household debt has had little effect on prices. December data showed values in small cities continued to rise, while they were mostly flat in top-tier conurbations like Guangzhou, Shenzhen and Beijing.

There are several reasons, though, why the 13-year rally 1 in house prices must end at some point.

First, banks are making borrowing tough, not only raising costs for home loans but also restricting supply, especially in major centers such as Beijing and Shenzhen, under a semi-official mortgage quota.

Even last year's stars, the second- and third-tier cities that led price gains, may fade as China curtails easy home loans that were intended to help soak up a glut of property. Downpayments there ranged between 20 and 30 percent, compared with 40 to 80 percent in top-tier locations, according to Credit Suisse Group AG. As the curbs bite, mortgage lending has started to decline.

Home Loan Slump

Year-on-year change in China's mortgage loans outstanding

Source: Bloomberg, National Bureau of Statistics of China

 (The other plank of household debt, consumer lending, has been an even bigger problem, surging 180 percent last year, according to Credit Suisse.)

Second, perhaps further down the line, a property tax is looming. Finance Minister Xiao Jie indicated this might happen as early as 2020. When President Xi Jinping exhorted people to remember that houses are for living, not speculation, real estate investors must have grown nervous; a tax will make them quake. 2  

With few investment options available to individuals beyond the volatile stock market and wealth-management products (more and more of which are being banned), it's no surprise that as much as 25 percent of the demand for real estate is speculative, according to Bloomberg Economics.

Third, there's the more immediate threat to real estate prices of a supply-side push by Beijing.

The government is starting to shift from tamping down demand to promoting new housing. Among measures the government is promoting, according to BNP Paribas SA economist Chen Xingdong, is encouraging homes where the government and buyers share property rights, and even allowing state-owned firms to sell apartments to their employees.

The government is also encouraging the growth of a rental market. While much of the current stock of rental housing is of poor quality, that's likely to change. 

A wave of supply is bound to push down prices, and not just in the big cities. This matters because real estate makes up almost three-quarters of the assets of Chinese households, compared with a little more than one-third in the U.S., and has a much bigger wealth effect anyway than stocks.

Besides, a severe stock rout probably would trigger a rescue by the kind of "national team" of brokerages and other institutions that bailed out markets in 2015. Already, China's securities regulator is urging brokerages to prevent clients closing out positions to limit share declines.

There's no such safety net for housing. So while a crash is unlikely, a period of nationwide price declines can't be far away. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. There was a brief dip during the global financial crisis. 

  2. There is a property tax in Chongqing and Shanghai but many buyers, including first-time purchasers, are exempt. 

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE