China Real Estate Bubble

8/8/2019 China Real Estate Bubble

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AARON TAY WEI LONG | SAMANTHA FONG LI WEN | LOO JING MIN | TEO SWEE LENG | POH SHU XIAN |RAYMOND TAN MIN WEI

A BUBBLE?

CHINA REAL ESTATE MARKET



INTRODUCTION POLICIES IMPLEMENTED

POLICIES IMPLEMENTED LOOKING TO THE FUTUREOF CHINA

LOOKING TO THE FUTUREOF CHINA

IS THERE A BUBBLE?

IS THERE A BUBBLE?

INTRODUCTION ± THE BUBBLE

Create excess

demand andproduction

Once bubbledeflates, need acontraction or consolidation

Economic andfinancial effects

Definition Problem

ER

Ty

Rapid increases in

valuations of realproperty until they

reach unsustainablelevels relative to

economic elements,followed by reduction in

price levels






IS THERE A BUBBLE?

IS THERE A BUBBLE?

Problem Past Bubbles


Create excess

demand andproduction

Once bubbledeflates, need acontraction or consolidation

Economic andfinancial effects

Irrational

Exuberance ²Robert Shiller

RationalSpeculation

Types of Bubbles






IS THERE A BUBBLE?

IS THERE A BUBBLE?


IDENTIFICATION PROBLEM

While the price of anasset is observable, the

correspondingfundamentals such as

the expected returnfrom the asset is not.

Ben S. Bernanke

No hard and fast definition

When is a boom a bubble?

Different economic schools of

thought Widespread attempts to

estimate the µfundamental value¶

for housing

Appropriate housing market

indicators

Hard to practice ³safe popping´

Assess which portion justified by

fundamentals

Monetary policy, a blunt tool



INTRODUCTION




IS THERE A BUBBLE?

IS THERE A BUBBLE?

REASONS WHY THERE IS NO BUBBLE

EXAMINING THE SYMPTOMS

Rising Income Support RealEstate Prices

Urbanisation Drives Demand




INTRODUCTION



LOOKING TO THE FUTUREOF CHINAIS THERE A BUBBLE?

IS THERE A BUBBLE?




Gains in home prices have

not dramatically outpaced

rising incomes



INTRODUCTIONINTRODUCTION POLICIES IMPLEMENTEDPOLICIES IMPLEMENTED LOOKING TO THE FUTUREOF CHINALOOKING TO THE FUTUREOF CHINAIS THERE A BUBBLE?IS THERE A BUBBLE?



Urbanisation Drives Demand

Stephen Roach (June 2010)

Chairman of Morgan Stanley Asia Ltd,

³The property boom in

China isn¶t a bubblebecause it¶s supported

by ³solid´ demand for

residential housing´

15 and 20 million people

migrate to cities annually

Two and a half µNew YorkCitiesµ created annually





Rapidly Increasing

Home Prices

High Price-to-

Income Ratios

High Price-to-RentRatios Vacant Properties

REASONS WHY THERE IS A BUBBLE




RAPIDLY INCREASING HOME PRICES


Real prices more than

doubled over the past decade

- Appreciation rates escalating

at the beginning of 2007 and

then again in early 2009.

41% (annualized) growth rate

for the first quarter of 2010

In general, average housingprices in China has tripled from

2005 to 2009 - Far East

Economic ReviewConstant Quality Price Index

Source: Wu, Gyourko and Deng (2010)




RAPIDLY INCREASING HOME PRICES


Shanghai

(1st Tier City)

- Real estate prices

increased by over

150% between 2003and 2010 ± NY Times

Tianjin (2nd Tier City)

- Projected to have

more prime office

space than can be

absorbed in 25 years

at the current rate -

Forbes.com




HIGH PRICE-TO-INCOME/PRICE TO RENT RATIO


³ But it was not high price levels alone that

convinced Case and Shiller (2003) and Shiller (2005) that US house prices had become

unsustainable ± it was the all-time high price ±

to-rent and price-to-income ratios´

Joseph Gyourko

Professor of Real Estate,Finance and Business and

Public Policy

University of Pennsylvania



INTRODUCTIONINTRODUCTION POLICIES IMPLEMENTEDPOLICIES IMPLEMENTEDLOOKING TO THE FUTURE

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LOOKING TO THE FUTURE

OF CHINAIS THERE A BUBBLE?IS THERE A BUBBLE?

HIGH PRICE-TO-INCOMERATIOS


2010 Annual Demographia International HousingAffordability Survey

Measure of housing affordability

Ratio:

Also measures the presence of

market distortions

Even though income growth has

been strong in urban China, price-to-income ratios also have beenincreasing in these same markets.

Median house price

Median household

income ( Annual)

Median house price

Median household

income ( Annual)




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HIGH PRICE-TO-INCOMERATIOS


Median house price

Median household

income ( Annual)

Median house price

Median household

income ( Annual)

Measure of housing affordability

Ratio:

Also measures the presence of

market distortions

Even though income growth has

been strong in urban China, price-to-income ratios also have beenincreasing in these same markets.




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HIGH PRICE-TO-INCOME RATIOS


Liu Weixin, an urban development specialist at the China Society of

Urban Economy in Beijing, told the Global Times:

± The high ratio of home price to income is a nationwide problem.

± Property price is also abnormally high in 2nd and 3rd-tier cities

Statistics on Beijing promulgated by State Statistics Bureau:

± Average price of commodity residence in Beijing in 2010 is 7000 Yuan

PSM

± Therefore, a 80 square meters house will cost 560,000 Yuan.

± MEDIAN annual income of each family in Beijing 34,000 Yuan.

± House price-to-income ratio in Beijing is 17/1




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HIGH PRICE-TO-INCOME

RATIOS

4 cities with the highest price-to-

income ratios are:

Shenzhen

Beijing

Shanghai

Hangzhou

Shenzhen ratio: > 20:1

Beijing ratio: 17:1




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HIGH PRICE-TO-INCOME

RATIOS

Singapore property bubble is

probable

Government measures

introduced

Singapore ratio is only 7:1

China¶s national average also

7:1

Once again, Beijing, Shanghaiand Hangzhou are mentioned




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HIGH PRICE-TO-RENT RATIOS

Each of the 8 cities is amongthe largest markets in China,

with none having a populationbelow 8 million.

Increase in speculative

purchases causes the number

of vacant apartments to rise.This causes rents in the area

to fall although property price

continue to rise ² Sardesai




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Price-to-rent ratios have increased by at least 30% over the past 3 or soyears in each of these cities.

Very large increase in Beijing, rising 75% from 2007 to 2010.

Hangzhou, Shanghai and Shenzhen also have seen their price-to-rent

ratios rise sharply to over 40.




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Q1, 2010

Global Property Guide




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Chinese City Has Many Buildings, but Few People - NY Times

VACANT PROPERTIES




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VACANT PROPERTIESCASE STUDY: ORDOS,

NORTHERN CHINA


Kangbashi, Ordos was

projected to have

300,000 residents

Government claims

that 28,000 people

live in the new area

Kangbashi, Ordos was

projected to have

300,000 residents

Government claims

that 28,000 people

live in the new area

Many other cities like

Ordos Eg. Kunming

Many other cities like

Ordos Eg. Kunming




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No Yes

IS THERE A BUBBLE?

THERE IS A BUBBLE




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CAUSES OF THE BUBBLE

CREDIT L ACK OF ALTERNATIVES

GOVERNMENTSUPPORT

YUAN

UNDERVALUATIONHOT MONEY INFLOW VESTED INTEREST




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CREDIT


Stimulus Package -Largest bailout as a

% of GDP

Too much moneyavailable




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CREDIT


As a result, M2money supply

exploded by 27% in

2009, outstripping

GDP growth.





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CREDIT


Increasing amount

of loans made in

2008 and 2009.

Lending standardsdropped

dramatically,

especially among

smaller banks.


Ease of Credit




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CREDIT


Extended period of

relatively low

interest rates

compared to the1990s prompted

borrowing.


Ease of Credit



INTRODUCTIONINTRODUCTION POLICIES IMPLEMENTEDPOLICIES IMPLEMENTED


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LACK OF ALTERNATIVES


Chinese wary of theequity market,

bubble in 2007,

resulted in market

losing 70% of its

value in 2008.

Bond market

relatively illiquid

Equity and BondMarket





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LACK OF ALTERNATIVES


1 yr CNY deposit

rate only 2.2.5%,

lower than inflation ±

negative real

interest rate.

Only recently raised

by 0.25%

Equity and BondMarket

Low Returns on

Savings





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GOVERNMENT SUPPORT


The government supported

property prices in 2008

during the financial crisis.

Property and construction

makes up 50% of China¶s

GDP growth. They would

not have been able to hit the

target growth rates otherwise.





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YUAN UNDERVALUATION


Not a question of if, but

how much.

Large amounts of hot money

inflows betting on

CNY appreciation.

PPP FEER BEER

40% 15 44% 7 10%





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UNSTERILISED HOT MONEY INFLOW


Hot money inflows often

end up in either the equity

or real estate.

Central bank unable to

fully sterilize hot money

inflows since 2004.





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LOCAL GOVERNMENTS


Local governments depend a lot on

leasing the rights to land for

income. Vested interest in not

letting prices fall.

Resettled residents use the

compensation as down-payment

for a house or two.





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PAST POLICIES AND ITS IMPACT

Late 2009 ² present

Cooling measures to curbsharp price increases

2008 H2 - late 2009

Turnaround to supportproperty market

2004 ² 2007

First round of cooling measures





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Period 2 was less effectivethan Period 1

Period 2 was less effectivethan Period 1





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2. Fiscal

Cut business and transaction taxes

for real estate sales

Local governments provide cashsubsidies

4 trillion RMB ($585 billion) two-year stimulus package

1. Monetary

In line with interest rate cuts, cut

preferential housing mortgage rates

TURNAROUND TO SUPPORT PROPERTY MARKET

(2008 H2 ± LATE 2009)





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TURNAROUND TO SUPPORT PROPERTY MARKET

(2008 H2 ± LATE 2009)

Largely ineffective since implementation in 2004

Dampens speculations for short period

For periods of 5 months and less

Buyers not greatly affected by policies

See policies as having limited impact

Property investments seen as extremely lucrative

Excessive liquidity and lack of investment avenues Buying property is only bet





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CURRENT POLICIES - 2010

2. FiscalProperty Tax Trial - To be first rolledout in cities like Shanghai and Beijing

Subsequent transition towardsproperty tax system for whole of China

1. RegulatoryTest impact of fall in house prices upto 60% in key cities

Stress tests on loans to range of

industries

State companies core business not inproperty to leave sector

Down payments and minimum

mortgage rates increase

Banks stop providing mortgages for buyers buying 3rd and 4th homes





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POLICY RECOMMENDATIONS

Implementation of property tax system

Speculators buy properties and leave them empty

Increase carrying cost for them with tax

Land sales alone not a sufficient revenue source

Government can use property taxation as recurring source of revenue



INTRODUCTION POLICIES IMPLEMENTEDPOLICIES IMPLEMENTED


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GLOBAL COMPARISON WITH JAPAN AND USA





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SIMILARITIES


Rampant Rise in Home Values High Money Supply

Speculation Overconfidence and

euphoria of market participants

Government expansionary

monetary policies

Rising housing value relative to GDP

Inconsistent projection and over valuation of housing fundamentals

values

Sources:

Bank for international Settlements: Determinants for house prices in 9 Asia Pacific Economies; Global Property Guide; Market Oracle; Forbes Asia





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SIMILARITIES


Source: HSCS analysis

3.83.8

1.81.8





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SIMILARITIES


Source: HSCS analysis

3.83.8

1.81.8

Sharp rise from 1985-1990 due to massive speculation in the real estatemarkets emerged as a result of macroeconomic policies in the 70s and

uncontrolled increases in the money supply.





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DIFFERENCES


CHINA2007- PRESENT

JAPAN1985-1991

US2000-2007

STATUS OF ECONOMY

THEN POTENTIAL GROWTH RATE

HIGH GROWTH

10%

LOWER GROWTH

3-4%

MATURED ECONOMY

3%

PROPERTY PRICE HIKE RATE(CAGR)

PERIOD OF BUBBLE

TOTAL PRICE HIKE

12%

ONGOING

2X

30%

6 YEARS

5X

10%

7 YEARS

2X

MARKET RESIDENTIAL COMMERCIAL RESIDENTIAL

SIZE OF CREDIT TO PROPERTYSECTOR

40% OF GDP 50% OF GDP 80% OF GDP

LEVERAGE LOW HIGH HIGH

LENDERS BANKS BANKS SECURITIZATION

Ozeki, K. (2009). The Chinese Real Estate Market: A Comparison with Japan's Bubble. P imco Asian P erspectives





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CONSEQUENCES - JAPAN


Companies in

Financial

Difficulty

Companies in

Financial

Difficulty

Construction

and Real Estate

Companies

Default

Construction

and Real Estate

Companies

Default

Japanese Banks

stuck with NPL

Loans

Japanese Banks

stuck with NPL

Loans

Economic

Growth Affected

Economic

Growth Affected

Many real estate companies and other companies that speculatedwith excess funds in the stock and property market foundthemselves in serious financial difficulties





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Construction & Realestate loan was thehighest

Companies in

Financial

Difficulty

Companies in

Financial

Difficulty

Construction

and Real Estate

Companies

Default

Construction

and Real Estate

Companies

Default

Japanese Banks

stuck with NPL

Loans

Japanese Banks

stuck with NPL

Loans

Economic

Growth Affected

Economic

Growth Affected





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Banking Sector - 35trillion yen of

nonperforming loans,

which represents

about 7% of GDP

(1996)

Companies in

Financial

Difficulty

Companies in

Financial

Difficulty

Construction

and Real Estate

Companies

Default

Construction

and Real Estate

Companies

Default

Japanese Banks

stuck with NPL

Loans

Japanese Banks

stuck with NPL

Loans

Economic

Growth Affected

Economic

Growth Affected





INTRODUCTIONPOLICIES IMPLEMENTEDPOLICIES IMPLEMENTED


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CONSEQUENCES - USA


USA home mortgage debt relativeto GDP increased from an averageof 46% during the 1990s to 73% during 2008, reaching $10.5 trillion

Home

Mortgage Debt

Increased

Home

Mortgage Debt

Increased

Went into

Financial Crisis

Went into

Financial Crisis

Economic

Growth

Affected

Economic

Growth

Affected





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CONSEQUENCES - USA


GDP decreased by 6% annually

Consumption and Investmentdropped

Home

Mortgage Debt

Increased

Home

Mortgage Debt

Increased

Went into

Financial Crisis

Went into

Financial Crisis

Economic

Growth

Affected

Economic

Growth

Affected





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A GENERIC CONSEQUENCE OF PROPERTY BUBBLE

FUTURE CONSEQUENCES

Increase in Non Performing Loans (NPL) Affects the economy as a wholeBanking Crisis

Household wealth (Consumption)Wealth Effect

Affects Trade (Import & Exports)Affect other countries

Banking Crisis

Wealth Effect

Affect other countries







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FUTURE CONSEQUENCES

Banking Crisis

Wealth Effect


CONSEQUENCES - CHINA





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FUTURE CONSEQUENCES

Banking Crisis

Wealth Effect


CONSEQUENCES - CHINA

Massive NonPerforming Loans

Subprime Crisis

Economic HardLanding







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FUTURE CONSEQUENCES

Caused by policytightening to tackleinflation or negativeexternal shocks

New Loans ExtendedIn 2009

Potential SharpSlowdown in GDP

CURRENT SITUATION - MASSIVE NON PERFORMING LOANS



INTRODUCTION POLICIES IMPLEMENTEDPOLICIES IMPLEMENTEDLOOKING TO THE FUTURE

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IMPACT ON CHINA - MASSIVE NON-PERFORMING

LOANS

FUTURE CONSEQUENCES

Impact

Considerable Bank loans belongs to LocalGovernment Financing Platforms

Government guarantees China Fiscal position remains quitestrong. Risk is manageable.

Collateralized Property Loans Average loan ratio for the system remaincomfortably low




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CHINA- MASSIVE NON-PERFORMING LOANS?

FUTURE CONSEQUENCES




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CHINA- MASSIVE NON-PERFORMING LOANS?

FUTURE CONSEQUENCES

Highly unlikely for China to face the same impact as Japan hadfaced.




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SUBPRIME CRISIS

Future Consequences

Borrowing increasedsharply

RMB 7.66bn at end of June 2010

17%

of totaloutstanding loans

22% GDP

Local GovernmentFinancing Platforms






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CHINA- SUB PRIME CRISIS?

FUTURE CONSEQUENCES

Impact

Local Government AssetsLocal Government has sufficient assets

that could be privatized to help service debts

Fiscal Federalism SystemSound fiscal positionCentral Government should be able to bail

out local government




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CHINA- SUB-PRIME CRISIS?

FUTURE CONSEQUENCES

Highly unlikely for China to face the same impact as USA had faced.




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HARD LANDING

Future Consequences

Property Transaction

Property Transactiondeclined sharply

Weak property saleslead to slowdown inconstruction activity

Causing hard landingin fixed assetinvestment growth




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FUTURE CONSEQUENCES

Impact

Serious Damage to Economy

Slow GrowthWeak Job market

Global Commodity prices will plunge asChina has contributed the bulk of marginal

demand for key commodities.

Affecting other Countries Australia & USA

IMPACT ON CHINA - ECONOMIC HARD LANDING






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FUTURE CONSEQUENCES

Major Australian Exports (2009- 10) (A$m)

Iron ore and Concentrates 25,112

Coal 5,067

Copper Ore & Concentrates 1,719

Wool & Other Animal Hair 1,522

Iron Ore and concentrates are raw materials for construction If property bubble bursts in China, there will be a decrease in demand for Australia




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FUTURE CONSEQUENCES

Affect their economy & affect other countries





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FUTURE CONSEQUENCES

Highly likely for China to face the same impact as Japan or USA hadfaced.




LOOKING TO THE FUTURELOOKING TO THE FUTURE

CONSEQUENCES FOR CHINA

FUTURE CONSEQUENCES

Greater Impact on Economic Growth thanFinancial Stability

Impact on the banking system is less likelyBanking Crisis

Consumption could be hit Sales of big-ticket items will be affected Negative wealth effect will also undermine

consumer confidence

Wealth Effect

Commodity exporting countries affectedAffect other countries

Documents

China Real Estate Bubble