Not-so-fun bubbles

June 12, 2013 admin

6-12 Girl blowing bubblesIs there a kid anywhere in the world who doesn’t thrill at the thought of blowing and chasing after soap bubbles? In the global real estate arena, however, “bubble” is a dirty — and much debated — word.

The pain of the U.S. subprime residential mortgage–backed securities fiasco was the bursting bubble felt around the world. After years of slogging through a painful recovery since the onset of the global financial crisis in 2008, the U.S. housing market is rebounding, albeit slowly.

But in China, there is still much debate about whether its soaring residential market is experiencing a bubble, and when it might burst if there is one. In a recent interview with CNBC, Chris Brooke, president and CEO of CBRE China, discussed why investing in China’s housing market — which could go up 8 percent this year and 3 percent in 2014, according to an RTRS poll — may not be as risky as some may think. Brooke cited strong underlying demand and fundamentals, from first-time homebuyers or those upgrading to new homes, as reasons why China’s housing market is not as troubled by a property bubble as it may appear at first glance.

Additionally, unlike in the United States or Spain, homebuyers in China are typically all-cash buyers and not as reliant on the use of leverage, which makes them less susceptible to short-term volatility in the market, Brooke said. This allows Chinese homebuyer to hold onto these assets for longer periods of time, even with potential slow price growth in the residential sector.

However, Brooke indicated, the full effects remain to be seen of the Chinese government’s enforcements in March of a 20 percent capital gains tax and higher down payments, which have recently started to slow transaction volume, especially in second-tier markets.

“The government has a very delicate balance to strike between controlling prices but allowing the residential markets continue [to grow] given the importance of the real estate sector in the overall economic growth story in China,” Brooke noted.

CBRE’s March 2013 report for the 70-city CBRE China National Commodity Housing Price Index (January 2006 = 100) recorded a 10th consecutive month-on-month increase, up 1.4 points, edging the index up to another new historical high at 149.8. Of the 70 cities surveyed, 68 cities had a month-on-month price increase.

In early June, Robert Ciemniak, founder, CEO and chief analyst of Real Estate Foresight, wrote a blog post that includes an animated chart based on changes during the past two years to the SouFun CREIS 100 Cities House Price Index for Major Cities.

In his post, Ciemniak notes that while new governmental policies and restrictions in China have garnered much attention, “data for the last few years would suggest it’s only the monetary policy that really carries weight on house prices.” In an earlier post, Ciemniak explained that the loosening of monetary policy in mid-2012 — especially the two interest rate cuts — clearly reflect the long rebound in housing prices since that time.

Prices for new homes in China were up 6.9 percent year-over-year in May, according to a June 3 Bloomberg News article reviewing data from SouFun Holdings, which tracks housing price changes across 100 cities in China. Despite the Chinese government’s recent plan to extend a trial property tax program beyond Shanghai and Chongqing, SouFun expects gains in housing prices to “remain relatively strong” given “rising land prices, supply shortages in key cities and expectations of looser monetary policy.”

Key to watch will be how China’s government goes beyond short-term policy changes to try to curb demand and housing price growth — efforts to contain potential bubbles — to actually restructure its residential market with respect to issues such as taxation and land supply, according to CBRE’s Brooke. Such restructuring will take time and won’t be without challenges, but is necessary for the long-term health of China’s residential market.

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Jennifer-Molloy91x119Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.

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