When the wealthiest industrialists and retailers start to sell off property at prices 30% less than those expected in 2013, you can be sure that there's trouble brewing in the real estate sector. This is exactly what has happened in China during the first few months of 2014 amid speculation that the country's property bubble has burst in a big way. Walmart will be closing its Zhaohui store in Hangzhou, the capital of Zhejiang province on April 23 and Asia's richest man, Li Ka-shing has recently sold a landmark Beijing property, fuelling fears that China's property boom is over.
However, the main cause for concern is coming from the residential real estate sector. Housing investment is the main driver of China's economy with property-sector loans accounting for one third of total lending in the country – equal to USD380 billion in 2013. A slowdown in the property market would signal the collapse of many developers potentially unable to repay banks and retail investors on highly leveraged housing projects.
The ripple effect of a decline in the property sector would course tsunami-like throughout Chinese society. Due to restrictions set by the Chinese Government, citizens are unable to invest in much else aside from real estate and approximately 66% of a the average family's assets were estimated to be tied up in property in 2013. A downturn in the property market would negatively impact the value of such consumer investments creating lifestyle concerns over the long term.
Perhaps the Chinese Government will provide timely intervention before what is now purely a threat becomes a reality. One thing is for sure – the ramifications of a property slump to the world's second largest economy are such that the Chinese Government would be ill-advised to ignore them.
How wrong could it get for the Chinese property market? The Chinese have a very different approach and views on their local property markets which have been misread on many occasions by western commentators and analysts, so much so there have even been long term funds set up to short the lending markets.
Find out more on how different the Chinese property is compared to the West here and decide for yourself if it can really be as bad as the West predict.
- Thursday 17 April 2014