Value Walk - Rupert Hargreaves - 01 March 2017
It looks as if China’s property market is finally starting to roll over as data the country’s National Bureau of Statistics and research from BMI Research indicates that property prices in primary cities are starting to fall and the number of non-performing property loans held by banks is starting to rise.
Last month, data released by the National Bureau of Statistics revealed prices of newly built residential properties dropped between 0.1% and 0.4% in December across 12 out of 15 “hotspot” cities. This is first sign of market weakness in China’s primary property market cities, which have seen the majority of home price growth during the past months. In key cities such as Shanghai and Beijing price rises reached 5% a month at the height of the property boom last summer.
After 2015’s dramatic stock rout, investors rushed to buy property during 2016 but due to fears of market overheating, more than 20 city governments past restrictions on house purchases and increased the minimum down payment required for a mortgage last autumn.
China’s Property Market Cooling
It looks as if these efforts to cool the property market are having some impact. However, falling property prices are bad news for buyers who borrowed heavily to speculate on the asset bubble.
Last year, when property price growth hit a high of 25% year-on-year in Tier 1 and Tier 2 cities, the land auction premium in these cities hit nearly 60% as buyers rushed to get their hands on building land.
As ValueWalk reported last year, many of China’s property speculators rushed to load up on easy credit in order not to miss out on market gains. But it now looks as if this rush to buy may be coming back to haunt the market.
China’s Property Market – How Bad?
According to new figures from BMI Research, a financial consulting firm, rising levels of non-performing property related loans in the Chinese financial sector, indicates the country’s real estate bubble is rapidly deflating and spiralling loan losses could pose a systemic risk to the wider Chinese economy.
BMI believes that while the Chinese government’s official non-performing loan figure is 1.75% of all Chinese loans, the actual figure is closer to 20%. The consulting firm goes on to point out that last year as banks rushed to give credit to real estate developers and buyers, profitability collapsed, undermining banks’ ability to offset loan losses. Per BMI’s figures, during the second quarter of last year growth in mortgage loans at major Chinese commercial banks hit a multi-year high of 31% year-on-year. Profits at the same banks however increased by less than 1%.