After mainland property prices rose for a 17th straight month in September, an increasing number of analysts are concluding that China is in danger of suffering a housing bubble. The sharp increase in housing prices that saw once catatonic markets such as Changzhou in Jiangsu province rise 6.6 percent last month is driving market experts to point to risks on banks’ balance sheets should inflated values burst, according to a report by Bloomberg.
In an analysis of what could happen in a downturn, researchers at investment bank DBS Vickers Hong Kong found that a drop in prices of 30 percent could trigger 4 percent of total loans worth RMB 4.1 trillion ($615 billion) to become delinquent, while Commerzbank AG forecasts a similar estimate given the price drop.
Just two years ago, developers in Changzhou — which was one of China’s hottest markets last month — were discounting properties by as much as 36 percent as the third-tier industrial city became a posterchild for China’s then slumping market.
More Voices Join the Bubble Chorus
With home sales back on the upswing after a flood of cheap credit this year, prices in first-tier cities such as Beijing, Shanghai and Shenzhen have risen some 30 to 40 percent in the past 12 months. Portfolio manager in Singapore at Pimco Roland Mieth viewed this as concerning, stating, “Those increases in price year on year at 30 percent or more tend to suggest a bubble-like phenomenon.”
Even some of China’s biggest property developers are calling the current market overinflated, with Dalian Wanda chairman Wang Jianlin telling CNN last month that China’s real estate sector is facing the biggest housing bubble in history.
Although a sharp correction in China’s property market isn’t DBS Vickers’ baseline case, the firm’s research director, Shujin Chen believes the housing sector is the most significant concern for China’s banking system.
“If the property prices decline a lot, it would affect the quality of loans to property developers first because they are the most highly levered. The second-tier impact will be mortgages,” the analyst told Bloomberg.
Chinese homebuilders have increasingly taken on more leverage as the amount of total debt among the mainland’s 144 listed developers now stands at RMB 2.8 trillion ($419 billion). Median total debt among these builders increased from 4.9 to 8.1 times earnings before interest, taxes, depreciation and amortization in the past five years.