The authors of this note, Hanming Fang, Quanlin Gu, Wei Xiong and Li‐An Zhou from the universities of Pennsylvania, Peking and Princeton, serve up some real zingers for the uninformed about why China’s residential property market is not pre-bust Japan or the gaussian copula worshiping U.S. of the early naughties.
Their observations are all the more interesting given the data set from which they’re drawn. A ‘large commercial bank’ (they don’t name them) with an all China 15% market share has allowed them to see their residential mortgage book for the ten year period from 2003 to 2013, all in over a million transactions.
So why should we be (as I am, have been and will remain) relaxed about the residential property market in China? There are six main reasons I took away from the paper.
1) Down payment; you can’t buy property in China unless you have at LEAST 30% of the value of the property in cash. In fact the average down payment in the observed data was nearly 40%.
2) Income growth; property prices have gone up a lot in China in recent years but so have wages. In fact in the smaller cities observed wage growth over the study period was HIGHER than property price appreciation.
3) Full recourse; if you default on a mortgage in China the bank can come after not only the property but any and all other assets you may have until they are made whole on their outstanding loan balance. A far cry from the JINGLE-MAIL problem in the U.S.
4) True financial burden; much has been made of the home price/income ratio in China which superficially appears high. Adjust for the down payment effect (monthly payments are lower and often parents pony this up) and the fact that many properties are bought by singles in anticipation of becoming two income units and the TRUE financial burden of property ownership appears much more reasonable.
5) Economic dynamics; yes, China is slowing, but it’s still moving at a far more dramatic pace then either Japan or the U.S. were when they were on the eves of their respective calamities. GROWTH papers over a lot of cracks.
6) TINA. You’re a saver, in China, and you’ve built up a respectable wad in recent years. Where do you put it to work? Stocks? They’ve been dreadful for as long as anyone can remember. Deposits? Maybe you can play the Wealth Management Product game but if you’re risk averse the basic bank deposit is the only place to park funds and rates there are neck and neck (probably some way behind the true number) inflation. Home prices on the other hand have had a great ten years and, if incomes are going to continue to rise (they will), the next ten doesn’t look too worrying. [TINA? There Is No Alternative]
The authors conclude that for all the reassurance their study provides a lot of investor attitude in the property market is explained by earnings growth and the assumption that the future looks something like the past. Should those expectations be suddenly and/or significantly modified that would be a serious issue; especially in the first tier cities.
Until that day then, of all the things to vex about in China presently, the residential property market is not one of them [Cynics may here insert their predictable ‘YET!’s]
Happy Sunday
You can access the paper in full via the following link Demystifying the Chinese Housing Boom