China's Property Boom

Editor’s Note: Chinese property prices jumped a record 11.7% over the last year, its National Bureau of Statistics said early this morning. The Chinese government has tried and tried again this year to throw some cold water on the steaming housing market…raising mortgage rates above market prices and imposing higher sales taxes on homes. But it’s all in vain…home prices crept up another 1.1% in March alone.

Again, Hainan Island is the epicenter of the insanity. Property prices in Haikou, its capital city, are up 65% in the last year. What’s the Chinese word for ‘bubble’ again?

China’s housing market is hot, but it’s not a bubble on the verge of bursting.

The price of housing in China has risen as the economy has expanded, but the chart from BCA Research shows that housing price growth has been significantly slower than GDP growth since the late 1980s.

Rising Chinese Property Prices

The price of housing has roughly doubled since the late 1990s, but it’s important to remember that China’s prices have risen from a much lower base than in the developed countries (among them, Britain, Ireland and Spain) in which bubbles were created. It’s also relevant to point out that household disposable income in China more than doubled during the period. The rise of the Chinese middle class is a major global economic phenomenon – tens of millions of people are added each year…

Demand is still strong. A recent survey by the Hong Kong-based brokerage CLSA found that 56% of China’s middle-class families are considering buying a new home – despite the higher prices, many families can pay a 30% down payment because of their higher savings.

Our own research shows that property developers, coming off a good 2009, are expanding into second- and third-tier cities, where housing markets are also growing and prices are more affordable.

This widening of opportunity, combined with the government’s early recognition that decisive measures were needed, together will raise the probability that it will achieve its goal of slowing down home price increases without causing the market to collapse.

Frank Holmes
for The Daily Reckoning