Is China’s Property Market a Bubble or Balloon?

The markets have proven to be quite resilient despite long-running international concerns about China’s property bubble. The Chinese government has instituted various austerity measures to cool down the market, but buoyant demand for property has helped avoid any serious downturn. Various factors continue to support the Chinese property sector. Some of the factors include the increasing urbanization rate, abundant liquidity and the lack of investment alternatives. Although we project the market to slow gradually in 2018, investors see an attractive opportunity for bond investments in the larger real estate development sector.

The percentage of China’s population living in urban areas has been rising from 36% to 58% since 2000. Not only that, but more than 300 million Chinese have migrated from rural to urban areas thus creating a huge demand for new housing in that time. Demand has varied across cities and regions. For example, the real estate market along the eastern coastal areas is the most robust, underpinned by positive population inflows and strongest economic growth region. However, there’s downside on this as well. It is more exposed to policy tightening due to higher property prices. The fundamental outlook for most inland lower-tier cities is less attractive as a result of continued population outflows.

China’s M2 represents the broader money supply, which has been growing at double-digits over the past two decades. The capital controls have restricted the Chinese government from investing this money in overseas markets, but there are also limitations to the available onshore investment channels. Onshore interest rates in terms of bond yields and bank deposits also remain low while the domestic equity market is extremely volatile. The Chinese government tends to offer support when the market is in a frenzy, for example the global financial crisis in 2009. However, authorities impose restrictions in an attempt to rein in run-away property prices, especially in coastal regions. The latest step towards tightening started in 2016 after the property market experienced a strong rebound with policies ranging from home purchase restrictions to a price cap on new developments.

Analysts say, “There is no sign of policy relaxation in the near future as Chinese authorities are determined to prevent poverty prices from rising too fast. As a result, we expect a gradual slowdown in China’s property market in 2018”. Despite recent government efforts to rebalance China’s economy by stimulating domestic consumption and supporting high-tech innovations, property remains the most important sector in terms of its contribution to GDP growth. Accelerating consolidation has been one of the biggest growth sectors over the past few years. Not only that, but large developers enjoy significantly better access to a broad range of funding channels at lower costs.

Investors should look into bond investments that lie with larger developments that benefit sector consolidation and demonstrate an improving credit profile. Chinese developers have been active in the offshore U.S. dollar bond market which has raised funds to support their rapid growth. This is a great opportunity for investors to reconsider and think about the market going forward.