China's housing bubble is starting to look a lot like the US in 2006
For the first quarter, residential prices in Shenzhen are up nearly 80% year-over-year, while those in Shanghai were up by roughly 65%, according to figures cited by Capital Economics analysts.
And the surge in residential property sales throughout 2016 has been driven by the loosening of some purchase restrictions at local levels, and rate cuts, which have reduced mortgage costs by a significant amount.In the short run, this is good for growth. Already, China's GDP breakdown showed an uptick in real estate-related services in the first quarter, as the analysts at Capital Economics observed.
However, not everyone's jazzed about what's going on.
"In particular, there are concerns that these rapid price gains are the result of a relaxation in lending standards that has echoes, some suggest, of the run-up to the subprime mortgage crisis in the US," they continued.
Notably, the Capital Economics duo, suggests that there is some truth to these worries.
As they explained in their research note (emphasis ours):"There have been cases of buyers skirting mortgage restrictions and borrowing to cover down-payments. What's more, prices are extremely stretched in some cities. Our calculations suggest the ratio of prices to average incomes in Shenzhen hit 76 at the end of last year, even before the latest surge in prices. This figure isn't directly comparable with equivalent ratios for other parts of the world since the data we have for China only cover sales of new property which are skewed towards the luxury end of the market. But even by the city's own standards the ratio is worryingly high at almost twice the 15-year average. A sharp correction in prices at some point seems likely."
Moreover, interestingly, a report from Bloomberg News from early March noted how "leveraged speculators are snapping up homes in top-tier cities [in China] in hopes that prices will keep surging."
For what it's worth, Warren Buffett previously explained the reasonable herd-mentality behind the US' housing bubble, quoting Benjamin Graham: "You can get in a whole lot more trouble in investing with a sound premise than with a false premise."
"...if you really believe that houses are going to go up in value, you buy one as soon as you can," Buffett told the FCIC. "And the price action becomes so important to people that it takes over the - it takes over their minds."
That being said, this doesn't mean that China's on the precipice of total collapse, the Capital Economics team argued.
Second, although the down-payment requirements have been eased, mortgages are still pretty hard to get, they write.Also, somewhat interestingly, Williams and Evans-Pritchard note that even though there are differences in price spikes across the cities, there's not a whole lot of difference when it comes to demand. As such, the duo writes that the price differences seem to reflect differences in supply.
"The upshot is that while rapid prices in a few cities where supply is tight have been widely publicized, the real story for the lion's share of the country's property market is that stronger demand is helping to absorb excess supply without prices becoming a major concern," they wrote.
"That should be viewed as a positive development."