90% of US CFOs in China Believe There’s a Real Estate Bubble

While market analysts remain divided over whether property prices in China are overinflated, the executives charged with safeguarding corporate finances are nearly unanimous in seeing a real estate bubble, according to recent survey.

The study by Duke University and CFO magazine interviewed 36 chief financial officers at a wide variety of US firms active in China, and found that 90 percent believe that there is a bubble in real estate prices, and 30 percent of these believe that the bubble will burst during 2014.

Fears of a collapse in China’s real estate markets have risen this year as the stream of low-cost credit that formerly fueled the industry has largely been cut off as state-run banks have tightened lending. The credit clampdown came in response to several months of double-digit increases in housing prices in the country’s major cities during the second half of 2013.

With land prices reaching record levels in China’s first-tier markets in recent months at the same time that transaction volumes for new home sales are slowing down, the potential for developers to start discounting amidst rising costs has some analyst raising concerns of a downward spiral for in the industry.

Is It a Bubble If It Doesn’t Burst?

However, while the respondents in the Duke survey were relatively clear in pointing to the existence of a bubble, how severe they believe the problem to be is still open to interpretation.

With only 30 percent predicting that the bubble would burst this year, it would appear that the remaining 70 percent believe that prices could remain steady or continue to grow for at least another 12 months.

Potential for Damage Amid Overall Optimism

The impact that the respondents see a downturn in real estate prices having on China’s economy as a whole was also cause for concern among the finance executives. In the case that there is a market slide, 75 percent of the China CFOs polled believe that a deflated real estate market would pose a medium or significant problem for China’s economy.

Should China’s property market suffer a serious setback, the impact is likely to be felt globally, and not just locally. “If the real estate bubble were to burst in the world’s second largest economy — China — the reverberations across the globe would be massive,” said Professor Campbell R Harvey, of Duke’s Fuqua School of Business.

Optimism Falling Off

While the statistics do not indicate widespread panic, nearly a third of the CFOs supervising China operations are less optimistic now than they were three months ago.

Among the respondents to the poll, 30.6 percent said that they were more optimistic about China’s economy than they were three months ago, 38.9 percent said there was no change in their sentiment, and 30.6 percent said they were less optimistic.

Duke’s study is being conducted for the 72nd consecutive quarter, and was concluded on March 6th. The survey polls a wide range of companies both public and private across many industries and includes a full range of company sizes. The study has been named by Wall Street Research firm ISI as one of the 15 most important leading economic indicators.

For those of you who wish to deep-dive into the China numbers, your pal at Mingtiandi has broken out the data into a handy PDF which you can download here.