Chinese wealth in real estate magnifies risks of property market bust

BEIJING — The concentration of wealth in real estate by households in China is magnifying the danger to the world’s second-largest economy of any property bust, as the nation grapples with the consequences of its record credit surge.

About 66.1 per cent of family assets were in housing last year, a national survey of about 28,000 households shows. Mortgage debt as a share of disposable income rose to 30 per cent from 18 per cent in 2008, according to estimates by Mr Nicholas Lardy from the Peterson Institute for International Economics in Washington.

The build-up raises the stakes for any slide in property prices amid China’s efforts to head off defaults by local governments and developers that propelled a run-up in borrowing that now amounts to more than double the size of the economy, said Goldman Sachs.

A hit to household wealth could impair consumer spending, rebuffing policy makers’ efforts to rebalance the economy towards domestic demand.

“A fall in housing prices could have significant knock-on effects on private consumption,” said Mr Eswar Prasad, a former chief of the International Monetary Fund’s China division and now Economics Professor at Cornell University in Ithaca, New York.

“Such a hit to private consumption could pose significant macroeconomic risks, both to headline growth and the process of rebalancing growth,” he added.

China’s households piled into real estate in recent years as they sought returns beyond the regulated caps on savings deposits. With the nation’s stock market failing to keep pace with economic growth, property offered an alternative, along with trusts that channelled credit to borrowers outside the official banking system.

For now, there may be little sign of danger. Home prices in December had the biggest year-on-year gain in 2013, increasing 12 per cent, said SouFun Holdings, China’s biggest real-estate website owner.

Mr Liu Li-Gang, Chief Economist for Greater China at Australia & New Zealand Banking Group, said risks may mount in coming years as China opens its capital account, giving property owners in major cities such as Beijing the opportunity to rush to the exit, shifting their money overseas if they think prices are not sustainable.

China’s policy makers have attempted to rein in the unprecedented credit boom they unleashed in 2008-2009 amid the global financial crisis, as risk mounted that some of the loans would go bad. Goldman Sachs analysts estimated in a July report that the nation’s total debt-to-gross domestic product ratio jumped almost 60 percentage points since the crisis, to almost 210 per cent.

Whether triggered by a cut-off in financing or a collapse in demand, any bust in the housing market would have an economic effect that is difficult to calculate, given China has not been through such a crisis in recent history.

“A decline in home prices will definitely have a negative impact on consumption — but since we’ve never had a sustained home-price decline in China, any estimate is quite judgmental,” said Mr Ding Shuang, senior China economist at Citigroup in Hong Kong.

Higher down payments for homes — typically 30 per cent of the purchase price — and the lack of mortgage securitisation reduce risks of the kind of financial panic and recession that the United States experienced in the past decade.

About 30 per cent of Chinese buyers pay cash, estimates Mr Liu Yuan, a Shanghai-based researcher at real estate brokerage Centaline.

One potential channel for affecting the economy is through the “wealth effect”, where households tighten their budgets after seeing a decline in their net assets due to a slide in the value of property they hold.

“A sharp decline in house prices would have a perceptible negative effect on household private consumption expenditure, even if it did not lead to substantial stress in the financial sector,” said Mr Lardy, who has studied China’s economy for more than three decades.

Any hit to consumption would impair efforts by President Xi Jinping and Premier Li Keqiang to step up the role of spending in the domestic economy and reduce reliance on exports. Last October, Mr Li said expanding domestic demand was the most important key to adjusting the structure of the world’s second-largest economy. BLOOMBERG